THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2018 | FAR REACHING CHANGES
Pursuant to the Insolvency Law Reform Committee Report dated 3 April 2018 (Report), the Government has promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ordinance) on 6 June 2018 to implement the recommendations in the Report by amending the Insolvency and Bankruptcy Code, 2016 (IBC).
The objectives of the Ordinance are inter alia (i) to balance the interests of various stakeholders in the IBC especially interests of home buyers and micro, small and medium enterprises; (ii) promoting resolution over liquidation of the corporate debtor by lowering the voting threshold of the Committee of Creditors (CoC); and (iii) streamlining provisions relating to eligibility of resolution applicants.
This update briefly summarises the important amendments introduced by the Ordinance in line with its objectives.
Inclusion of Home Buyers in the IBC.
- An Explanation has been added to the definition of financial debt in Section 5(8)(f) of the IBC which provides that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of borrowing. The definition of allottee and real estate project are to be taken from the Real Estate (Regulation and Development) Act, 2016. Thus, home buyers who have paid an advance or a deposit would be deemed to be financial creditors under the IBC;
- A new sub-section 6A has been added to Section 21 of the IBC which deals with the CoC. Under this sub-clause where a financial debt is owed to a class of creditors exceeding a specified number, the interim resolution professional (IRP) must make an application to the National Company Law Tribunal along with a list of all financial creditors containing the name of an insolvency professional (IP) (other than the IRP) to act as the authorised representative of the class of creditors and the NCLT must appoint such IP prior to the first meeting of the CoC. The authorised representative (AR) must attend meetings of the CoC and vote on behalf of the financial creditors in the manner set out in the Ordinance;
- A new Section 25A has been added which deals with the manner in which an AR is to represent the financial creditors on whose behalf he acts at the meetings of the CoC. In brief: (i) AR must take the prior voting instructions of the financial creditors whom he represents through physical or electronic means. AR must act in the interests of the financial creditor he represents and vote in accordance with the prior instructions received from such financial creditor. If AR represents multiple financial creditors then he must cast his vote in respect of each financial creditor in accordance with the instructions received from such financial creditor to the extent of his voting share; (ii) If any financial creditor does not give instructions to his AR, the AR must abstain from voting to the extent of the voting share of such financial creditor; (iii) The instructions received from the financial creditor must be filed with the CoC;
- In relation to MSME`s a new section 240-A has been added which removes two of the disqualifications to be a resolution applicant for such MSME. The first relates to having an account that has been classified as a non-performing asset for a period of one year and the second relates to having executed a guarantee in relation to the debt of a corporate debtor against whom an insolvency application has been admitted. Further, the Central Government has been empowered to exclude the application of the IBC to MSMEs.
Lowering the Voting Threshold of the CoC
- The voting threshold for decisions of the CoC under various provisions of the IBC including Section 12 (Time Limit for Completion of Insolvency Resolution Process), Section 22 (Appointment of Resolution Professional) Section 27 (Replacement of the Resolution Professional by the Committee of Creditors) Section 28 (Approval of Committee of Creditors for Certain Actions) has been reduced from 75% to 66%;
- Further, decisions of the CoC other than as specified in the IBC can be taken by a simple majority (51%) of the creditors;
Other Important Changes
- Written consent of the resolution professional is now required for any appointment under the IBC;
- A new Section 12A has been introduced which provides for the NCLT to allow for a withdrawal of an application admitted under the IBC with the approval of 90% of the creditors on the CoC in a manner that is to be prescribed;
- The moratorium under Section 14 of the IBC no longer applies to a guarantor who has given a guarantee in relation to the debt of the corporate debtor;
- The Limitation Act, 1963 now applies to proceedings before all the adjudicating authorities under the IBC.
The inclusion of home buyers as financial creditors under the IBC provides another avenue for such home buyers to act against errant developers. This inclusion is a source of debate since RERA was also enacted for this purpose. Over the last two years the IBC has been seen as a speedy way of getting relief and this could bring succour to home buyers who have parted with their hard-earned earnings to developers who are unable to complete projects. The only drawback of the IBC is that it is not a recovery mechanism but the nature of the insolvency resolution process leads to a settlement in a large number of cases. Issues however remain on how the voting process at the CoC would be conducted where there are a number of homebuyers represented by an authorised representative. The Insolvency and Bankruptcy Board has been tasked with prescribing this process. The other amendments to the IBC under the Ordinance seek to set at rest unresolved issues that had arisen and for which clear cut Court / Tribunal rulings were absent. While a positive step, implementation of the provisions of the Ordinance would need to be assessed. This update was released on 19 June 2018.
This update was released on 19 Jun 2018.
Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
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