By Shantanu Saharan & Shreyas Santra
Introduction
The Insolvency and Bankruptcy Code (Amendment) Act, 2019[1] was passed by the House of People without much contention unlike the previous Bills approved by the parliament on Insolvency Law. The Insolvency and Bankruptcy Code, 2016 [“IBC”], over the years, has precipitated from the efforts of Late Mr. Arun Jaitley, an astute lawyer and parliamentarian.[2] He was responsible for piloting major changes, during his tenure as Finance Minister, in reinvigorating the financial conditions of banks and arresting the growth of NPAs by developing a time-bound mechanism under the IBC for reviving bankrupt companies, or facilitating their liquidation.[3] IBC was the tool through which Mr. Jaitley fulfilled the promise of the incumbent government, to support Public Sector Banks [“PSB”] in recovering their dues and ensure repayment of debts to investors. The 2019 amendment to the IBC, introduced by Smt. Nirmala Sitharaman, is the third amendment to the same in a short duration of three years. This amendment not only underscores the dynamic nature of the Code but also highlights its rapid evolution to incorporate the law laid down by the Courts.
Earlier, the Supreme Court of India gave a stay order[4] on a recent judgment of NCLAT in Essar Steel Case on 22nd July, with a view to put all the classes of creditors (operational, financial, homebuyers, etc) at the same level. The NCLAT in Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors.[5] had held that the amount generated as profit during the Corporate Insolvency Resolution Process [“CIRP”], should be distributed amongst the financial creditors and operational creditors on pro-rata basis, thereby placing them on an equal footing. The present amendment is a response of the government to the Supreme Court’s judgment in the Essar case.
This was an impediment for all stakeholders, as the interpretation of the IBC by the courts was evidently keeping the unsecured or operational creditors at the back foot in the Resolution Process, which was ‘defeating the spirit and purpose of the enactment’, in the words of the current Finance Minister.
Another cause of growing concern for the legislature in PSBs was the delay in the resolution process due to extensive appeals and adjournments in NCLT. The CIRP was delayed in most of the cases whereas cases which were referred to the NCLT by the government were taking nearly double the time of the minimum period for CIRP prescribed under the IBC (270 days), due to the stay on the proceedings by the High Courts and the apex court.
The Ministry of Corporate Affairs had, interestingly, submitted to the court that it is opposed to the treatment of financial and operational creditors on the same footing, and view the Essar Steel judgment as an antithesis to the spirit of the IBC. The Ministry is of the view that the distribution scheme prescribed in the said judgment will dilute the distinction between secured, unsecured and operational creditors.[6]
In view of the aforesaid developments, we will briefly discuss the amendments brought to the IBC which have come into force on 05.08.2019.
Widening the ambit of corporate resolution (Section 5)
The Amendment has clarified that a resolution plan, proposing insolvency resolution of corporate debtor as a going concern may include the provisions for corporate restructuring, including by way of merger, amalgamation and demerger. Previously corporate resolution did not include these. Now the scope of corporate resolution has been widened and many more options have now opened to the committee of creditors to facilitate resolution of insolvency.
The amendment will enable the market to come up with dynamic resolution plans as, earlier, it was unclear if restructuring could be proposed in the resolution plan. In fact, if we look at the successful resolution plans so far, we will find that the business of the corporate debtor has been acquired by the resolution applicant. No corporate restructuring has taken place until now under the IBC framework.
Time Limit for Resolution Process (Section 12)
The Amendment adds that the resolution should be completed within 330 days. This includes time for any exclusion granted and the time taken for legal proceedings in relation to the insolvency process. In case the resolution process does not get completed within the given time-frame, the liquidation will automatically be triggered. On the enactment of the Amending Act, if any case is pending for more than 330 days, the same must be resolved within 90 days.
The corporate debtors stalled the insolvency process by filing appeals and applications before the NCLT, NCLAT and Supreme Court. After this amendment however, the scenario will change completely and the insolvency process will not be stalled unnecessarily. The pressure will mount on unscrupulous borrowers to settle their dues with financial creditors. Bankers will significantly benefit from this amendment.
Manner of voting by representative of a group of creditors (Section 25A)
This amendment lays down the method of voting by authorized representative of financial creditors having more than 50% voting shares in aggregate. The new section states that the votes of all financial creditors covered under section 21(6A) shall be cast in accordance with decision approved by highest voting share (more than 50%) of financial creditors.
This change will help the authorized representative to effectively participate in the Committee of Creditors meetings and be decisive in safeguarding the interests of financial creditors. This amendment will be beneficial for those creditors who have advanced loans as member of consortium of banks. It will also empower financial creditors in insolvency proceedings.
Minimum payout to Operational Creditor (Section 30)
The amendment provides that the amount to be paid to the operational creditor should be higher of the following two –
(1) Amount receivable under liquidation, and
(2) Amount receivable under a resolution plan,
if such amounts were distributed under the same order of priority (as for liquidation).
Previously, it was likely, as has happened in numerous cases; operational creditors would not receive their dues as financial creditors had priority over them. The provisions stated that the operational creditors will be paid back in the manner prescribed by the board.
This amendment thus ensures that the operational creditors gets taken care of, which in the long run will ensure the good health of the industry as the operational creditors will not be unwilling to engage further in business with the manufacturer. This will force the CoC to adopt a new strategy regarding the manner of distribution in the resolution plan.
Resolution plan binding on governmental authorities (Section 31)
The approved resolution plan shall be binding on all stakeholders including central government, any state government or local authorities to whom statutory dues are owed.
Previously government authorities would initiate parallel legal proceedings against the corporate debtors. Now all government authorities will be bound by the order of NCLT and the approved resolution plan as payment of their dues, arrears is included in the resolution plan. No request of any government body post approval, which used to cause delays, will be entertained as the amendment clearly states that once the RP is approved, it shall be binding on all.
Anytime liquidation (Section 33)
The amendment added an explanation to the section 33, which states that the Committee of Creditors has the power to take the decision to liquidate the corporate debtor at any time after the constitution of Committee of Creditors and before approval of the resolution plan. Previously liquidation would take place only after the committee of creditors had exhausted all efforts to revive the corporate debtor. It was reserved as the last option for the committee of creditors to salvage the assets of the corporate debtor.
This amendment will reduce the time period of the insolvency resolution process, in cases where liquidation of assets of the party is the best approach to recover the dues which was previously exhausted in revival attempts and legal proceedings. It gives greater powers to the committee of creditors which, in theory, may decide to liquidate the corporate debtor in its very first meeting.
Conclusion
Certain recent judicial pronouncements have been contrary to the code and this has driven the legislators to pass the recent amendment to the IBC.
The amendment, which is the third time since it was introduced, has been made with a view to enhance the investor and creditor confidence in the resolution process under the young code as well as to address the requirement due to the evolving situation of Indian markets.
The prompt efforts of the government are much appreciated here as the amendment facilitates the removing the ambiguity in the Code which will help in obtaining a more optimal outcome.
The authors are Managers (Law) at Punjab and Sind Bank. Both of them have obtained their LLM degrees from Manipal University, Jaipur and IIT Kharagpur respectively.
[1] The Insolvency and Bankruptcy Code (Amendment) Act No. 26 of 2019 (India).
[2] Shri Arun Jaitley, Two years of insolvency and Bankruptcy Code (IBC), Press Information Bureau, Government of India, Ministry of Corporate Affairs.
[3] Subrata Panda, IBC process helps recover Rs. 70,000 – Crore bad loans in FY 19: CRISIL, Business Standard, (May 15, 2019) https://www.business-standard.com/article/companies/ibc-recovery-rate-for-cases-in-fy19-races-ahead-of-other-mechanisms-crisil-119051400915_1.html.
[4] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Anr., Civil Appeal Diary No. 24417/2019.
[5] Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors., Company Appeal (AT) (Ins.) No. 242 of 2019.
[6] Ruchika Chitravanshi, IBC Amendment Bill tabled in Rajya Sabha, govt backs financial creditors, Business Standard, (Jul. 25, 2019) https://www.business-standard.com/article/economy-policy/ibc-amendment-bill-tabled-in-rajya-sabha-govt-backs-financial-creditors-119072500063_1.html.
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