Latest wave of IBC reforms

IBC streamlining process is always on …

In the process of streamlining the insolvency resolution procedures established under the Insolvency and Bankruptcy Code (IBC), the central government has announced another round of amendments to the IBC to weed out certain problematic provisions to ensure systematic/smooth enforcement.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (Ordinance) dated 28th December, 2019 has been notified to tweak certain provisions of IBC.

The underlying intent in the passage of the Ordinance is to ease the flow of proceedings in relation to insolvency resolution process, to enhance investor confidence and to further scale up the prospect of ease of doing business in India.

The key objectives of the Ordinance are as follows:

a) To facilitate a corporate debtor to procure the requisite funding to run the company as an ongoing concern to escape the prospect of insolvency of a company (which is on the edge of facing the insolvency/liquidation proceedings);

b) To provide immunity to corporate debtor from the fear of prosecution; and

c) To protect the property of corporate debtor from any claims subject to the corporate debtor fulfillment of applicable terms and conditions.

The following are the major highlights / implications of the Ordinance:

·       The major amendment is the seizure of corporate debtor liability for offences committed prior to commencement of CIRP. No corporate debtor shall be prosecuted after the Resolution Plan approval (S. 32).

·       This provision is also applicable to prosecution proceedings initiated during the CIRP. Corporate debtor property shall not be subject to any claim in relation to any offence committed prior to CIRP initiation (S. 32).

·       However, it is the responsibility of the corporate debtor to cooperate with the adjudicating authority and to provide all reasonable assistance to such authority in course of investigation of any offence committed prior to initiation of CIRP.

·       The liability of partner of an LLP /an officer in default of corporate debtor will continue despite of the seizure of corporate debtor liability.

·       A corporate debtor has the authority to file an application (via Insolvency Resolution Professional/ Resolution Professional (RP)/ Liquidator/Resolution Applicant/ Monitoring Agency) against another corporate debtor for purpose of CIRP instigation with the end objective is being recovery of dues owed to main corporate debtor. 

·       Such application will have the knack to maximize the valuation of corporate debtor (S.11). 

·       This amendment will play vital role in closing the longstanding debate on the application of Section 11 of IBC as National Company Law Tribunal branches of Mumbai and Delhi had expressed divergent views on the application of Section 11.

·       The ambit of moratorium provision application is extended to protection of the license, permit, registration, quota, concessions, clearances or other similar rights during the CIRP. However, the moratorium will not be applicable in case of payment defaults (S 14).

·       If in the opinion of IRP it is vital for the survival of corporate debtor as an ongoing concern – the supply chain of goods and services will be rendered to the extent necessary for corporate debtor survival.

·       IRP is conferred with the authority to permit continuation of the goods and services which are critical to the corporate debtor survival as an ongoing concern – This prospect will facilitate the maximization of corporate debtor value.

·       Until the time Resolution Plan is sanctioned pursuant to Section 31 or appointment of liquidator by the adjudicating authority pursuant to Section 34 – RP will have the authority to manage the affairs of the corporate debtor.

·       The aforesaid proposition will ease the functionality of the RP as they won’t be under the obligation to file certain applications for requisite directions.

·       Subject to the limit of minimum threshold mandated under the IBC – The financial creditors belonging to the same class can initiate the insolvency process.

·       Joint application by a minimum of 100 allottees/debenture or bond holders/public depositors or 10% of such allottees/debenture or bond holders/public depositors will constitute the mandatory threshold limit for filing the application.

·       This provision will restrict the individual allottee/debenture or bond holder/public depositor from bring the corporate debtor under the ambit of IBC.

·       Applications which are pending before the NCLT will also cover under the scope of such mandatory threshold limit.

·       30 days duration is established as a compliance period for the applicants of such pending applications to meet with the mandatory threshold limit.  

·       Failure to comply with the mandatory threshold limit will result in the consideration of such pending applications status as withdrawn.

·       Corporate Insolvency Resolution Process (CIRP) commencement date would be the Insolvency Resolution Professional (IRP) appointment date.

·       Phrase (“and such other debts as may be notified”) is inserted after Section 5(15) of IBC to widen the ambit of Interim Finance.

·       Interim finance shall be treated as per the norms pertinent to additional finance pursuant to Reserve Bank of India (RBI) circular on Prudential Framework for Resolution of Stressed Assets.

If implemented properly, the amendments have the potential to create a fearless environment for the genuine bidders to participate in the proceedings and amplify investor confidence in the country's financial system.

At the same time it is crucial to put apt measures in place to ensure that defaulters will not use the law to their advantage and get away free without getting punished for their defaults.

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The above is for general information only and is not a legal opinion.