- Insolvency and Bankruptcy Code, 2016
- Insolvency and Bankruptcy Code (Amendment) Bill, 2020
- Resolution Plan
- Time-limit for Resolution
- Insolvency commencement date
- Threshold for initiating resolution process
- Corporate debtors entitled to make application
- Liabilities for prior offences
Insolvency & Bankruptcy Code (Amendment) Bill, 2020
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Parliament had passed amendments to the insolvency law that will help safeguard successful bidders of insolvent companies from the risk of criminal proceedings for offences committed by previous promoters. The Insolvency and Bankruptcy Code (Amendment) Bill, 2020 was passed by voice vote in Rajya Sabha on March 12, 2020. It was approved by Lok Sabha on March 6.
Insolvency and Bankruptcy Code, 2016:
- The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
- Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress.
- A distressed asset has a life cycle. Its value declines with time, if the distress is not addressed. IBC aims at early resolution of the disputes.
- Insolvency Resolution: The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms.
- The process may be initiated by either the debtor or the creditors.
- The code aims to protect the interests of small investors and make the process of doing business less cumbersome.
- Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it.
- The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.
Insolvency and Bankruptcy Code (Amendment) Bill, 2020:
- The Bill amends the Insolvency and Bankruptcy Code, 2016.
- Under the Code, a financial creditor may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process.
- The NCLT must find the existence of default within 14 days.
- Thereafter, a Committee of Creditors (CoC) consisting of financial creditors will be constituted for taking decisions regarding insolvency resolution.
- The CoC may either decide to restructure the debtor’s debt by preparing a resolution plan or liquidate the debtor’s assets.
- The Code provides that the resolution plan must ensure that the operational creditors receive an amount which should not be lesser than the amount they would receive in case of liquidation.
- The Bill amends this to provide that the amounts to be paid to the operational creditor should be the higher of: (i) amounts receivable under liquidation, and (ii) the amount receivable under a resolution plan, if such amounts were distributed under the same order of priority (as for liquidation).
- Further, the Bill states that this provision would also apply to insolvency processes: (i) that have not been approved or rejected by the National Company Law Tribunal (NCLT), (ii) that have been appealed to the National Company Appellate Tribunal or Supreme Court, and (iii) where legal proceedings have been initiated in any court against the decision of the NCLT.
Time-limit for resolution:
- The Code states that the insolvency resolution process must be completed within 180 days, extendable by a period of up to 90 days.
- The Bill adds that the resolution process must be completed within 330 days.
- This includes time for any extension granted and the time taken in legal proceedings in relation to the process.
- On the enactment of the Bill, if any case is pending for over 330 days, the Bill states it must be resolved within 90 days.
Insolvency commencement date
- The Bill omits clarify that the insolvency commencement date is the date of admission of an application for initiating corporate insolvency resolution process (CIRP).
- Presently under the Code, the insolvency resolution process commences when the Insolvency Resolution Professional (IRP) is appointed by the adjudicating authority.
Threshold for initiating resolution process
- The Bill also specifies the minimum threshold for certain classes of financial creditors for initiating insolvency 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 Bill adds an additional requirement for certain classes of financial creditors for filing 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.
Corporate debtors entitled to make application
- The Bill further clarifies that a corporate debtor should not be prevented from filing an application for initiation of corporate insolvency resolution process against other corporate debtors.
- A corporate debtor undergoing CIRP, or having completed CIRP 12 months preceding the date of making of the application or in respect of whom a liquidation order has been made, etc. shall not be entitled to make an application to initiate CIRP.
Liabilities for prior offences
- The Bill provides that a company will not be liable for any offence committed prior to the commencement of the CIRP and the company will not be prosecuted for such an offence from the date the resolution plan is approved by the NCLT, if the resolution plan results in the change in the management or control of the company.
- Further, the Bill provides immunity to the company from attachment, seizure, retention, or confiscation of their property in relation to such offences.
- The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process.
- It aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners.
- The latest changes pertain to various sections of the IBC as well as the introduction of a new section.
- A need was felt to give the highest priority in repayment to last mile funding to corporate debtors to prevent insolvency, in case the company goes into corporate insolvency resolution process or liquidation.
- It aims to prevent potential abuse of the Code by certain classes of financial creditors, to provide immunity against prosecution of the corporate debtor and action against the property of the corporate debtor.
- Further for successful resolution applicant subject to fulfillment of certain conditions, and in order to fill the critical gaps in the corporate insolvency framework, it has become necessary to amend certain provisions of the Insolvency and Bankruptcy Code, 2016.
The Insolvency and Bankruptcy Code which had the primary objective is rescuing companies in distress is slowly validating its purpose. It is the achievement of the Insolvency Code that the debtors now are resolving defaults in the early stages. The increasing numbers of applications being filed under IBC indicate the value and trust that stakeholders place on the law and are the ultimate test of its efficacy.