After Lok Sabha, the upper house of Parliament, Rajya Sabha also cleared the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated on December 28, 2019. The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 (similar to the Ordinance) was introduced in Lok Sabha on December 12, 2019. The Bill was referred to the Standing Committee on Finance on December 23, 2019.
Highlights of the Ordinance
- The Code allows creditors to initiate an insolvency resolution process if a company defaults on its payments. The Ordinance introduces an additional threshold for certain classes of financial creditors, including allottees of real estate projects, for initiating the resolution process. At least 10% of them or 100 such persons have to jointly initiate the process.
- The Ordinance empowers the resolution professional to require suppliers to continue providing goods and services. This provision will not apply if the debtor has unpaid dues arising from such supplies during the moratorium period.
- The Ordinance provides that the company will not be liable for any offence committed prior to the insolvency resolution process if there is a change in the management or control of the company.
- Under the Code, the insolvency resolution process commences when the Insolvency Resolution Professional (IRP) is appointed. The Ordinance states that the IRP must be appointed on the date of admission of the application by NCLT, which will be considered as the insolvency commencement date.
Key Issues and Analysis
- In case of defaults by real estate developers, the insolvency resolution application should be filed jointly by at least 100 homebuyers or 10% of their total number. The rationale for adding such a threshold only for certain creditors is unclear. Further, a homebuyer wishing to initiate the process may not have details of other allottees.
- The Ordinance empowers the resolution professional to require suppliers to continue providing goods and services during the moratorium period. This provision overrides the agency of suppliers to negotiate and decide whether to continue a contractual arrangement. It may also force the supply of goods and services even if the supplier finds it risky or unviable.
- In order to balance the rights of the suppliers, the Ordinance provides that suppliers have to continue supplying only if their current dues are paid. In other countries, additional safeguards are available. These include the right to seek a payment guarantee, and court-granted permission to terminate the contract in cases where the supplier demonstrates that continuation will cause hardship.
Key Features
- The threshold for certain creditors for initiating resolution process: The Code allows the creditors to initiate an insolvency resolution process if the amount of default by the debtor is at least one lakh rupees. The Ordinance adds an additional requirement for certain classes of financial creditors for filing the application. These classes include real estate allottees and security or deposit holders represented by a trustee or agent. The application by these creditors should be filed jointly by at least 100 such creditors or 10% of their total number, whichever is less.
- Supply of critical goods and services not to be discontinued: The Ordinance mandates that the supplies of goods and services considered critical by the resolution professional cannot be discontinued during the moratorium period. Moratorium period refers to the time period during which NCLT prohibits persons from taking certain actions against the corporate debtor, such as filing or continuation of suits, execution of court orders, or recovery of property. This applies to goods and services that are considered critical to protect and preserve the value of the debtor and manage its operations as a going concern. Suppliers of critical goods and services can stop supplying if: (i) the debtor has not paid dues arising from the supplies during the moratorium period, or (ii) in certain other circumstances as may be specified.
- Licenses and permits not to be terminated due to insolvency: The Ordinance states that any existing license, permit, registration, or clearance given by any government authority to the debtor will not be suspended or terminated due to insolvency. This provision will be applicable as long as the debtor does not default in the payment of current dues arising for the use or continuation of such licenses or permits.
- Liabilities for prior offences: The Ordinance states that the company will not be liable for any offence committed prior to the commencement of the insolvency resolution process. Such liabilities will cease and the company will not be prosecuted from the date the resolution plan is approved by the NCLT. Further, the Ordinance provides immunity to the company from actions against their property in relation to such offences. Such actions include attachment, seizure, retention, or confiscation of property.
- Immunity to the company will be given only if the resolution plan results in a change in the management or control of the company. The new management should not include: (i) a person who was a promoter, or in the management or control, of the company, (ii) a related party of such a person, or (iii) a person suspicious of abetting or conspiring for the commission of the offence against whom a complaint has been filed in court. Further, officers in default or persons associated with the company and directly or indirectly involved in the offences committed by the company will continue to be liable for those offences.
- Appointment of the Interim Resolution Professional and commencement date: Under the Code, the insolvency commencement date is the date on which an application for corporate insolvency resolution process (CIRP) is admitted. An Insolvency Resolution Professional (IRP) is required to be appointed within 14 days from the date of admission of the application for CIRP. The date of appointment of the IRP is treated as the insolvency commencement date. The Ordinance states that the IRP must be appointed on the date of admission of the application, which will be considered as the insolvency commencement date.
