Changes aim to halt abuse of insolvency proceedings

By Deepak Sabharwal, Deepak Sabharwal & Associates

A rise in high-profile banking frauds led to the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. The ordinance, effective from 6 June, presses for greater transparency in the corporate insolvency resolution process (CIRP), to prevent unscrupulous persons from misusing or vitiating the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC).

Deepak SabharwalManaging partnerDeepak  Sabharwal & Associates
Deepak Sabharwal
Managing partner
Deepak Sabharwal & Associates

The ordinance brings in some major changes, mainly in the real estate and financial sectors, and seeks to encourage sustainable growth of the credit market in India. Anyone with banking interests in India needs to evaluate and analyse the current insolvency law.

Key highlights of the ordinance are:

Applicability of Limitation Act: To resolve unclarity arising from various orders of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), section 238A has been inserted in the IBC, making the Limitation Act, 1963, applicable in proceedings or appeals before the NCLT, NCLAT, Debt Recovery Tribunal and Debt Recovery Appellate Tribunal.

Insertion of section 5(5A): This widens the scope of “corporate applicant” to include a corporate guarantor, i.e. a corporate person who is the surety in a contract of guarantee to a corporate debtor.

Recognition of homebuyers: An explanation inserted in section 5(8)(f) widens the scope of financial debt by including the amount raised from allottees of a real estate project and also gives such an amount the commercial effect of a borrowing. This ensures that frustrated homebuyers can now pursue a remedy under the IBC.

Reduction of voting threshold: Under section 12 of the IBC, the resolution professional (RP) can now extend the CIRP beyond 180 days if the committee of creditors (CoC) passes a resolution by a vote of 66%, down from 75%. In section 22, confirmation of the interim RP is now easier as the voting threshold has been reduced to 66% from 75%.

Insertion of section 12A: This allows settlement after the commencement of a CIRP. Applications under sections 7, 9 and 10 now can be withdrawn on approval by 90% of the voting shares of the CoC. A decision of the NCLAT, upheld by the Supreme Court, held that this was not previously allowed under the IBC.

Scope of moratorium reduced: In section 14, there is an insertion of 14(3)(b), which says that a moratorium will not include a surety in a contract of guarantee to a corporate debtor.

Amendment in section 30(2)(f): An explanation is added which says that if a resolution plan requires shareholder approval, such approval will be deemed to have been given.

Insertion of section 31(4): The resolution plan now is to be approved with all permissions within one year of approval of the plan by the CoC.

Proviso added: Under a proviso introduced in section 434 of the Companies Act, 2013, where a winding-up petition is pending in a high court, the petitioner can to apply for transfer of the proceedings to the NCLT, where the petition will be treated as one under the IBC.

Special treatment: The promoter of a micro, small or medium-sized enterprise in a CIRP will be allowed to bid for the enterprise provided that the promoter is not a wilful defaulter and is not disqualified for reasons unrelated to the default.

Besides the changes discussed above, by recognizing homebuyers as financial creditors, the ordinance offers hope for similar protection for retail customers who pay large advances to purchase goods or services.

The new disqualification factors in the amended section 29A narrow the scope of potential suitors who will be able to submit a bid for stressed assets. The widened scope of disqualification will restrict the number of persons eligible to participate in a CIRP but it will be enthralling to see how promoters who have defaulted because of factors beyond their control, such as poor business performance, and are now ineligible to submit resolution plans, choose to react to the ordinance.

The ordinance brings about useful changes such as relief to homebuyers and reduction of voting threshold in the CoC. The amendments fine-tune and streamline the CIRP and settle many contentious issues. The ordinance also attempts to remove the backdoor entry of corrupt promoters. However, whether the ordinance will serve the purpose of increasing the efficacy of the IBC will be seen over a period of time as this will depend on how the various stakeholders implement it.

Deepak Sabharwal is the managing partner of Deepak Sabharwal & Associates.

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