Insolvency and Bankruptcy Code Amended in line with the lapsed Insolvency and Bankruptcy Ordinance
The Government passed the Insolvency and Bankruptcy Code (Second Amendment) Act, (“Amendment”) to amend the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Amendment Act is passed practically on the lines of IBC Ordinance, 2018 (“Ordinance”) and has replaced it. The key changes are as follows:
- As it was done by the Ordinance, the Amendment also provides a significant relief to ‘home buyers’ by recognizing their status as ‘financial creditors’. This would give them due representation in the Committee of Creditors and make them an integral part of the decision-making process. It will also enable home buyers to initiate corporate insolvency resolution process against errant developers.
- With a view to encourage resolution as opposed to liquidation, the voting threshold has been brought down to 66% (Sixty-Six Percent) from 75% (Seventy-Five Percent) for all major decisions such as approval of resolution plan, extension of CIRP period, etc. Further, in order to facilitate the corporate debtor to continue as a going concern during the CIRP, the voting threshold for routine decisions has been reduced to 51% (Fifty-One Percent).
- The Amendment also provides that a promotor of Micro, Small and Medium Sector Enterprises (“MSME”) is not disqualified to bid for its enterprise undergoing Corporate Insolvency Resolution Process (“CIRP”) provided that it is not a wilful defaulter and does not attract other disqualifications related to default. Further, Central Government has been empowered to allow further exemptions or modifications with respect to the MSME Sector, if required, in public interest.
- However, the Amendment has introduced a strict procedure for withdrawing a case after its admission under the Code. Henceforth, such withdrawal would be permissible only with the approval of the Committee of Creditors with 90% (Ninety Percent) of the voting share. Furthermore, such withdrawal will only be permissible before publication of notice inviting Expressions of Interest.
- Prior to the Amendment, self-filing of an application for initiation of CIRP was decided by the directors of the Corporate Debtor themselves by passing a board resolution. After this Amendment, filing of such an application requires a Special Resolution passed by the shareholders of the Corporate Debtor.
- The Amendment also provides for a mechanism to allow participation of security holders, deposit holders and all other classes of financial creditors that exceed a certain number, in meetings of the Committee of Creditors, through authorized representation.
- The existing Section regarding eligibility for becoming a resolution applicant has also been amended to exempt financial entities from being disqualified on account of holding non-performing assets (“NPA”). A resolution applicant holding an NPA by virtue of acquiring it in the past under the Code has been provided with a 3 (Three)-year cooling-off period, from the date of such acquisition. In other words, such NPA shall not disqualify the resolution applicant during the currency of the 3 (Three)-year grace period. Considering the wide range of disqualifications contained in this section, the Ordinance provides that the resolution applicant shall submit an affidavit certifying its eligibility to bid. The Ordinance also provides for a minimum 1 (One)-year grace period for the successful resolution applicant to fulfil various statutory obligations required under different laws.
- The other changes brought about by the Amendment include non-applicability of moratorium period to enforcement of guarantee, introducing the requirement of special resolution for corporate debtors to themselves trigger insolvency resolution under the Code, liberalizing terms and conditions of interim finance to facilitate financing of corporate debtor during CIRP period, and giving the IBBI a specific development role along with powers to levy fees in respect of services rendered.