IBC Amendment Bill: Credit Hierarchy Restored, Resolution Plans And Time Limit BindingBloombergQuintOpinion
The government has moved to put to rest several hurdles impeding corporate insolvencies in India via an amendment to the law. The actual text of the Insolvency and Bankruptcy Code (Amendment) Bill, 2019 is finally in the public domain and will soon seek passage in Parliament.
Whilst the salient features of the cabinet approval had been released last week, the Bill, in public domain, removes any fuzziness that commentators had on the interpretation of the eight amendments.
‘Complex’ Plans Can Be Part Of Resolution
The amendment to section 5(26) - which defines a resolution plan- now clarifies that a plan may include provisions for restructuring including by way of merger, amalgamation and demerger. Complex plans can be part of the insolvency process and the plan can deal with one or more companies as transferee companies in the course of insolvency proceedings for reviving the corporate debtor as a going concern.
Addressing Delays In Admission
IBC requires the Adjudicating Authority, mostly the National Company Law Tribunal, to determine the existence of a default within 14 days when an application initiating the insolvency process is made.
The proposed amendment to this provision introduces judicial discipline to say if such a determination hasn’t been made, the NCLT has to pass an order within 14 days from the insolvency commencement date to record the reasons in writing for such delay in determination. This will address the significant delays in listing of insolvency applications by the NCLT. In the past, some applications for initiation of corporate insolvency resolution process have not been listed for admission for periods exceeding four months before some of the appropriate tribunals.
Presently, the insolvency process has be to completed within 180 days, extendable up to 90 days under section 12(3). Through jurisprudence, courts have laid down that the time spent in litigation must be excluded from this 270-day period.
The amendment Bill has proposed that the insolvency process has to be completed mandatorily within 330 days from the insolvency commencement date, including an extension of the period granted under section 12(3) and the time taken in legal proceedings in relation to such resolution process of the corporate debtor. If the insolvency process has been pending and has not been completed within 330 days, then as a transitory extension of the resolution process, pending matters shall be completed within 90 days from the date of commencement of the IBC Amendment 2019.
The use of the word “mandatory” and “shall be completed” are a clear indication that the amendments to IBC are not directory in nature but constitute a mandatory compulsory indication to finish the insolvency process in a specified timeline of 330 days, without exception.
Cases where over two years have been taken in dealing with the resolution process should be conclusively determined in the extra time of 90 days from the commencement of the amendments.
In order to set right the impasse for conducting voting for a large number of home buyers that share the status of financial creditors, it is made expressly clear that the authorised representative shall cast his vote on behalf of all financial creditors represented by him, with the decision taken by a vote of more than 50 percent of the voting share of the financial creditors who have cast their vote. This change is notwithstanding the provisions of Section 25A(3).
It is clarified that for withdrawal of the application under section 12A, the authorised representative will, however, cast the vote as originally provided i.e. act in the interest of the home buyers and as per prior instructions.
Credit Hierarchy Restored
Section 30(2)(b) specifies that at the resolution plan stage, payment to operational creditors shall not be less than the amount to be paid to them in the event of liquidation of the corporate debtor. At the liquidation stage, the order of payments is specified in section 53(1) - insolvency process costs, dues of workmen, secured creditors, unsecured creditors, statutory dues and then operational creditors.
The amended section 30(2)(b) is substituted to specify that payments to operational creditors for their debt would be in a manner specified by the IBBI but shall not be less than:
(i) the amount to be paid to such creditors in the event of liquidation of the corporate debtor or
(ii) the amount that would have been paid to such creditors if the distribution was done based on the priority under Section 53(1),
It is specified that payments made to operational creditors shall be fair and equitable. In my opinion, it would not be permissible for any judicial interpretation to distort the priority different from what’s specified under section 53(1) and the extent and value of such payment shall also be determined based on the hierarchy specified under this section.
Further, the amendment provides that payments to dissenting financial creditors shall be decided as per regulations of the IBBI, but it shall not be less than the amount due to them in accordance with hierarchy specified at the liquidation stage.
As a clarification, it is provided that the amended section 30(2)(b) would be applicable to cases
- where the resolution plan has not been approved or rejected by the Adjudicating Authority or
- where an appeal has been preferred to the appellate authority or the Supreme Court or where such appeal is not time barred under any provision of law for the time being in force or
- where a legal proceeding has been initiated in any court against the decision of the Adjudicatory Authority in respect of a resolution plan.
This clarifies that the amendment to Section 30 is retrospective for pending proceedings in relation to the resolution plan, as above.
Additionally, it is also clarified that the manner of distribution must take into account the order of priority amongst creditors, including the priority and value of the security interest of a secured creditor. This change makes it beyond doubt that it is not open for the Adjudicating Authority or the Appellate Authority or any court to change either the priority or the value of the security interest of a secured creditor contrary to the principles of Section 53(1) of the IBC.
Making Resolution Plans Binding
The proposed amendments resolve the issue of the central or state government or a local authority raising demands post approval of the resolution plan by the Adjudicating Authority. It makes clear that the central or state government or a local authority - to whom statutory dues are owed - are also bound by the resolution plan as stakeholders.
If such a resolution plan has provided for cancellation of operational creditors debts or diminished taxes, which qualify as operational debts, or amounts payable to local authorities as royalty or fees are also bound by the resolution plan as approved by the Adjudicating Authority under Section 31(1) of the IBC.
Creditors’ Committee Empowered
The Bill provides that the Committee of Creditors may take the decision to liquidate the corporate debtor any time after the CoC is constituted and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum. Hence, if 66 percent of the CoC decides to liquidate the corporate debtor, it can abort an endless and futile procedure of insolvency when it is no longer justifiable to keep it going.
All in all, these eight amendments shall become effective from the coming into force of the IBC Amending Act from such date, as the Central Government by notification may appoint.
These significant changes are made to ensure that insolvency proceedings are mandatorily time bound and are not judicially extendable for more than once for a period of 90 days after the expiry of the 180 days available for resolution. A further time period of 60 days has been given to account for delays as a result of legal proceedings in relation to such resolution process.
The ability of the Appropriate Authority or the Appellate Authority or the courts to interpret and state that these amendments made by the legislature are directory in nature, has been plugged. The legislative intent is that the timelines are mandatory in nature. Even pending proceedings or resolution plan, which have exceeded 330 days by now, have merely 90 days extra from the commencement date of the IBC Amendment 2019 to finalise matters or to proceed to liquidation.
With these amendments and clarifications, the process of speedy adjudication and decision making should now be finally settled. No judicial interpretation or latin maxim should be further available to postpone the completion of the insolvency process or prevent proceedings to liquidate the corporate debtor (upon failure of the insolvency process) as determined by the requisite majority of the CoC.
Shardul Shroff is the executive chairman of law firm Shardul Amarchand Mangaldas & Co.
The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.