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Sanjay Buch
Crawford Bayley & Co, Mumbai
sanjay_buch@crawfordbayley.com

Jay Zaveri
Crawford Bayley & Co, Mumbai
jay.zaveri@crawfordbayley.com

 

Background

The Insolvency and Bankruptcy Code 2016 (the ‘Code’) was notified by the Government of India on 28 May 2016, with the object to consolidate and amend the law relating to insolvency resolution of corporate persons, partnership firms and individuals, in a time-bound manner for maximisation of value of assets of such persons. It aimed to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders, including alteration in the order of priority of payment of the government dues, and to establish an Insolvency and Bankruptcy Board of India, for matters connected therewith or incidental thereto.

The Code was a timely resolution for a corporate debtor, by providing an effective legal framework whereby the corporate debtor is brought back into the economic mainstream and is able to repay its debts, which, in turn, enhanced the viability of credit in the hands of financial institutions.

Ever since its inception, the Code has been amended multiple times in order to provide further clarity to existing provisions and to introduce new provisions encompassing situations which had not been previously envisaged.

The most recent amendments to the Code have taken place through the Insolvency and Bankruptcy Code (Amendment) Act 2020 (the ‘Insolvency Amendment Act’) and the Insolvency and Bankruptcy Code (Second Amendment) Act 2020 (the ‘Insolvency Second Amendment Act’), which have substantially altered the dynamic of the corporate insolvency resolution process (CIRP) in India.

Also, by a notification^[1] dated 24 March 2020, section 4 of the Code has been amended, wherein the minimum amount of default for initiation of CIRP has been increased from Rs 1 lakh (INR 100,000) to Rs 1 crore (INR 10m).

The Insolvency Amendment Act^[2] was notified on 13 March 2020, with a retrospective effect, being in force with effect from 28 December 2019 and bringing about significant changes to various sections of the Code, which have been categorically dealt with below.

Amendments to section 5 of the Code

The proviso to section 5(12), defining the ‘insolvency commencement date’, has been omitted, meaning that the insolvency commencement date for an application filed under section 7, 9 or 10 of the Code, for initiating CIRP against a corporate debtor, would be the date on which such application has been admitted by the Adjudicating Authority. Prior to the amendment, the insolvency commencement date was the date on which the Interim Resolution Professional (IRP) was appointed.

The scope of ‘interim finance’, defined under section 5(15), has been broadened to include any other debt as may be notified, in addition to financial debt that the Resolution Professional (RP) could raise during the CIRP.

Amendments to section 7 of the Code

By way of this amendment, three provisos have been introduced to section 7(1) of the Code, which make a provision for a minimum threshold for specific classes of financial creditors, in order for them to maintain an application under the Code, as follows:

• for the purpose of an application under section 21(6A), the same must be jointly filed by financial creditors by: not less than 100 such creditors in the same class; or not less than ten per cent of the total number of such creditors in the same class, whichever is less; and
• in case of allottees of real estate projects, an application for initiating CIRP must be filed jointly by: not less than 100 such allottees under the same real estate project; or not less than ten per cent of the total number of such allottees under the same real estate project, whichever is less.

The introduction of the aforementioned proviso implies that such financial creditors would not be able to maintain an application in their individual capacity.

A third proviso has been inserted to direct applicants to modify their applications, which are pending admission, in accordance with the above-mentioned provisos within a period of 30 days from the commencement of the Insolvency Amendment Act, failing which, such applications would be deemed to be withdrawn.

Amendments to section 11 of the Code

Section 11 of the Code specifically lays down categories of persons who would not be entitled to make an application for initiating CIRP under Part II of the Code. The amendment to this section has introduced an explanation to clarify that it would be open for a corporate debtor to initiate CIRP against another corporate debtor.

Amendments to section 14 of the Code

By introducing an explanation to section 14(1), it is clarified that a licence, permit, registration, quota, concession, clearances or a similar grant or right given by the Central or State Government, local authority, sectoral regulator or any other authority, would not be suspended or terminated on the ground of insolvency, so long as there is no default in payment of dues arising for the use or continuation thereof, during the moratorium period.

Similarly, section 14(2A) has been inserted to provide that, if the supply of goods or services is considered to be important by the RP/IRP to preserve the value of the corporate debtor and manage its operations, the same shall not be terminated or suspended during the moratorium period, so long as dues for the same have been paid.

The scope of section 14(3)(a) has been widened, whereby it has been substituted to provide that section 14(1) would not apply to such transactions, agreements or other arrangements, which may be notified by the Central Government, in consultation with any financial sector regulator or any other authority.

Amendments to section 16 of the Code

Section 16 of the Code pertains to the appointment and tenure of the IRP, which has been amended to provide that the IRP would be appointed by the Adjudicating Authority on the insolvency commencement date, in place of the 14 days’ period provided earlier, thereby expediting the entire process.

Amendments to section 21 of the Code

Section 21 of the Code makes a provision for the constitution of a Committee of Creditors (CoC), comprising of all financial creditors of the corporate debtor, wherein the proviso to section 21(2) provides that a financial creditor, being a related part of the corporate debtor, would not have any right of representation, participation or voting in a CoC meeting. The amendment has introduced a second proviso to section 21(2), which restricts the applicability of the first proviso, to be inapplicable to a financial creditor, regulated by a financial sector regulator, being a related party of the corporate debtor on account of conversion or substitution of debt into equity shares, instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date.

Amendments to section 23 of the Code

Section 23 of the Code empowers the RP to conduct the CIRP of the corporate debtor. The amendment to the proviso to section 23(1), empowers the RP to continue to manage the affairs and operations of the corporate debtor, pursuant to the expiry of the prescribed period of the CIRP, and until such time that the Adjudicating Authority approves a resolution plan, or appoints a liquidator under the Code.

Amendments to Section 29A of the Code

Section 29A enlists persons who would not be eligible to be resolution applicants (ie, submit a resolution plan). The explanation provided under section 29A(c) and (j), which defines a ‘related party’, has been amended to introduce the words ‘completion to such transactions as may be prescribed’ to allow the Central Government to prescribe any completed transaction for determining the eligibility of any person to be a resolution applicant, along with the restrictions laid down in the said section.

Introduction of section 32A to the Code

Section 32A has been introduced to the Code, which provides that the liability of a corporate debtor, for an offence committed prior to the commencement of the CIRP, shall cease, and the corporate debtor shall not be prosecuted for such offence from the date on which the resolution plan has been approved by the Adjudicating Authority and the same results in a change of management or control of the corporate debtor. Protection from liability under this section has been provided to:

1. a person who was not a promoter, or in the management of the corporate debtor or a related party thereof; or
2. a person, who, according to investigating authorities, was not involved in the abetment, or conspiracy for commission of the offence by the corporate debtor and has filed a report to the relevant court.

Such protection has also been provided for the property of the corporate debtor, covered under a resolution plan and approved by the Adjudicating Authority.

Amendments to section 227 of the Code

This section relates to the powers of the Central Government to notify financial service providers, wherein, an explanation has been introduced to provide that insolvency and liquidation proceedings for such service providers may be conducted in such manner as may be prescribed by the Central Government.

Amendments to section 239 of the Code

The said section empowers the Central Government by a notification to make rules for carrying out the purposes of the Code. This section has been amended to extend the matters in respect of which such rules may be made viz, transactions introduced in the second proviso of section 21(2), Explanation-I of section 29A(c) and the second proviso to section 29A(j).

Amendments to section 240 of the Code

Section 240 lays down the powers of the Insolvency and Bankruptcy Board of India to make regulations. The amendment introduces a clause, whereunder, the Board may make regulations in respect of circumstances under which supply of critical goods or services may be terminated or suspended during the moratorium period under section 14(2A) of the Code.

The Second Insolvency Amendment Act^[3] was notified on 23 September 2020, with a retrospective effect, thereby coming into force on 5 June 2020. The said Amendment Act, replaced the Insolvency and Bankruptcy (Amendment) Ordinance, 2020,^[4] which was promulgated on 5 June 2020, in the light of the on-going Covid-19 pandemic, in an attempt of the Central Government to provide certain reliefs to companies that may be distressed on account of the pandemic. The following amendments have been introduced:

Introduction of section 10A to the Code

Section 10A provides for a suspension of the initiation of CIRP, whereby no application under sections 7, 9 or 10 of the Code, for the initiation of CIRP of a corporate debtor can be filed, for any default arising on or after 25 March 2020, for a period of six months, as may be notified. It is also further clarified that no application for initiation of CIRP of a corporate debtor may ever be filed in respect of defaults occurring during the prescribed period. However, such an application may be filed for defaults which may have occurred before 25 March 2020.

It may be relevant to note that by a notification^[5] dated 24 September 2020 the applicability of section 10A of the Code has been extended by a further period of three months.

Introduction of section 66(3) to the Code

Section 66 provides that, if, during the CIRP, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority, may, on an application made by the RP, pass an order, direct a director or partner of the corporate debtor to make such contribution to the assets of the corporate debtor as it may deem fit. Section 66(3) has been introduced to restrict the filing of such an application by the RP, in respect of such default against which initiation of CIRP is suspended as per section 10A.

The Second Amendment Act has been brought into effect in order to overcome our highly distressed market scenario and address the credit exposures of various business enterprises, to prevent companies, which are otherwise viable, from going into insolvency proceedings, on account of the pandemic.