Nuances of Insolvency and Bankruptcy Code Amendment 2020 – By Ayush Jain and Shreevardhan Khemka

Nuances of Insolvency and Bankruptcy Code Amendment 2020

(Written by Ayush Jain {grduate B.Com LL.B (Hons.) and Shreevardhan Khemka {graduate B.Com Llb (Hons.)}]

Introduction

The Insolvency Bankruptcy Code (IBC) has been in limelight ever since it came into force. Being a new code, it has been amended many times to tackle challenges it faces to keep up with its objective. In march the Rajya Sabha cleared the Insolvency and Bankruptcy (Second Amendment) Bill, 2020, the amendment brings about many changes in the code like it expands the ambit of moratorium and gives immunity to CD in such a case where offence is committed prior to CIRP.  It also grants right to CD to initiate CIRP against its debtors. This amendment was much needed in the present scenario but is not an exception to critique.

Threshold for Applicants

The central government brought the amendment in Section 7 which provides for filing of application by a Financial Creditor (FC). After the amendment 10 percent of the total financial creditors or 100 financial creditors in number can file an application before the Adjudicating Authority. This criterion is for creditors comprising of real estate allottees, security or deposit holders. However, for the rest of the financial creditors there is no change in criteria to file an application. Prior to the amendment, the issue faced was that even one homebuyer, security or deposit holder could trigger the IBC due to which the operation of builders and successful completion of their projects came to a standstill.[1] This also affected the interest of other homebuyers and creditors, allottees of the same CD. Therefore, there was need to consider some changes and lay down a criterion for this class to file an application before the Adjudicating Authority (AA).

The Second Amendment Act, 2020 empowers even a single homebuyer cannot file an application under the code against the builder. Rather for an allottee to file an application he has to meet the criteria laid down that is either a total of 100 allottees can file an application or 10 % of the total number of allottees for the given project, whichever is lesser. It is pertinent to note at this point that the amendment treats homebuyers in a different footing all together even though they are financial creditors. Homebuyers are left with no way out but to adhere to the requirement laid down.

The amendment was brought to deal with the practical problems being faced, but is flawed as a homebuyer is not expected to know how many units have been sold or know about the other allottees facing problem in the same project.

The amendment has left homebuyers with no escape, aggrieved by the amendment they have filed a writ petition before the Hon’ble Supreme Court of India. In the matter of Manish Kumar & Ors. vs. Union of India,[2] the apex court has not stayed the amendment but passed an interim order to maintain the status quo of the application till the matter is pondered upon by the court.

Corporate Debtors are entitled to initiate CIRP against its Debtors

The Amendment gives opportunity to the company under CIRP i.e. Corporate Debtor to initiate CIRP against its own debtors in the case where the debtors have committed default under IBC. Therefore, under Section 11 following phrase is added as Explanation II– “For the purposes of this section, it is hereby clarified that nothing in this section shall prevent a Corporate Debtor referred to in clauses (a) to (d) from initiating corporate insolvency resolution process against another Corporate Debtor.” 

Before this amendment there was a bar on the CD to initiate proceedings against its debtors. This bar was contrary to the objective of the code to ensure completion of the CIRP in a time-bound manner for the maximization of the value of the assets. However, the earlier provision was a hurdle to initiate proceeding against those who are indebted to the CD. This was unfair to CD as they will be forced to go into liquidation.

There were divergent views regarding this issue between NCLT Mumbai and NCLT Delhi. This amendment upholds the view of NCLT Mumbai as laid down in the case Jai Ambe Enterprises vs. S.N. Plumbing Private Ltd.[3] that it is within Resolution Professionals (RP) power to initiate proceedings under Section 9 of the IBC against the debtors.

The only lacuna of this Amendment is that it can be deliberately used to cause unnecessary delay by initiating proceedings against the debtors. Since in every business there are a lot of creditors and debtors, this might result in a never-ending process of filing cases against the debtors by the CD.

Ambit of Section 14 Moratorium

The amendment has brought about a significant change in the scope of moratorium. It states that licenses, permits, registration, quota, concessions, clearances or grants given by the central government or the state government or any other local authority or regulator, cannot be terminated, suspended or cancelled just because the CD is facing insolvency proceedings. The only condition stipulated here in is that the CD should not default in the payment of current dues during the moratorium period which may affect the use or continuation of such license, grant, permits, registrations etc.

The amendment covers up an important aspect as prior to the amendment when a CD is going through insolvency, the authorities would terminate the licenses, permits, grants issued to the CD, thus making it hard for the CD to retain them. This caused serious hardship to the RP to keep the company as going concern after they have taken upon the management and also to the prospective resolution applicants who can revive the company but find it difficult to get back the licenses, permits, registrations. This sometimes resulted in creating a block in getting better Resolution Plans for the CD.

The SC had pondered upon the purpose of moratorium in the case of Embassy Property Development Pvt. Ltd. vs. State of Karnataka.[4] where in the issue was of deemed extension of lease granted by the government. The apex court concluded that Section 14 of IBC only prohibits the right to be dispossessed but not the right to renewal of lease. The purpose of moratorium is to preserve the status quo rather than to create a new right.

Further the amendment broadens the scope of essential services. It mandates that the supply of those goods and services that the Interim Resolution Professional (IRP) or the RP consider to be critical for the running of the operations of the CD as a going concern during the period of moratorium. The caveat here is that the CD shall not default in the payment arising out of such supply of services during the period of moratorium otherwise the supply of such services will be terminated or interrupted.

Before the amendment, the scope of essential services was not so wide, the amendments manifest powers in the hand of RP to decide on critical services required to keep the company as a going concern, which is the ultimate goal of IBC.

The amendment gives hope to the resolution applicants and make it relatively easier for the RP to run the business of the company. The amendment does not take into consideration the out of turn payments that may be demanded by the suppliers knowing that the company is under CIRP. The amendment fails to specify the manner in which the insolvency professional will deal with essential supplies nonetheless it should be provided under the regulations. It also fails to  consider that the insolvency resolution cost to include the cost for acquiring those essential services in lieu to keep the company as a going concern.

Clarification Regarding Insolvency Commencement Date

The confusion regarding the insolvency commencement date has been clarified by the Amendment. The Amendment states that IRP shall be appointed by the Adjudicating Authority on the insolvency commencement date.[5] Before the amendment IRP was to appointed within 14 days from the insolvency commencement date. Further, Section 5(12) is omitted which dealt with insolvency commencement date. It stated that in the case when IRP is not selected by the creditor and order of admission is passed under Section 7,9 or 10 then, in such a case insolvency commencement date shall be when the IRP is appointed. Therefore, omission of aforesaid section and amendment in section 16(1) clarifies that the date of admission of application shall be the insolvency commencement date.

This amendment will result in avoiding the delay caused in completion of the CIRP in a time-bound manner. This was needed because the applicants did not name the IRP to be appointed after the admission of the application which resulted in delay. But now expressly it has been stated in the Act that IRP has to be appointed on the date when the application for initiation of CIRP is admitted in the NCLT.

Resolution Professional to be in Charge of the Management of Corporate Debtor

The role of RP is clarified under this Amendment. The proviso is inserted under Section 23 (1) which empowers RP to manage the affairs of the CD even after the expiry of CIRP period until Adjudicating Authority passes an order for approval of resolution plan or appointment of liquidator. The Amendment will provide some relief to the RP as now there will be no need to file an application before NCLT to seek suitable directions time-to-time. This will ease the process for RP. Further, the responsibility of the RP is expressed clearly that he is the one who will drive the process i.e. managing the affairs of the Corporate Debtor till approval of resolution plan or appointment of liquidator by the Adjudicating Authority. 

Immunity to Corporate Debtor against Offence Committed prior to commencement of CIRP

 Section 32A is inserted to provide protection to the successful resolution applicant and their property from the criminal action to be taken against them for the offences committed by the erstwhile promoters.

Section 32 (1) states that when the resolution plan is approved by AA, no action can be taken against any offence committed by the CD before the commencement of CIRP and thus liability cease to exist. However, the benefit of this provision can only be availed when there is a change in management or control of the CD to a person who is not an erstwhile promoter or part of the management or related party. Further, it is clarified that if according to any investigating authority a person has abetted or conspired the offence or any report has been submitted or complaint is filed then such a person cannot get protection under this section.

While immunity is provided to the CD under this section but it is to be noted that there shall be no immunity to the liability of certain officers of the CD to designated partner under Limited Liability Partnership Act, 2008, officer who is in default as per Section 2 (60) Companies Act, 2013, etc. These persons shall be liable to be prosecuted and punished for the offence committed by the CD.

Further section 32A (2) states that in cases where the property of the CD is covered under the resolution plan approved by the Adjudicating Authority, no action like attachment, retention, seizure or confiscation of the property can be taken for the offence committed prior to the approval of resolution plan. The conditions mentioned under section 32A (1) for the change in management or control is also applicable to this subsection. Nevertheless, action can be taken against the property of any person except the CD or a person who acquires such property through CIRP or liquidation process.

This section is added to clear the ambiguity surrounding JSW steel Ltd.’s resolution plan for the Bhushan Power & Steel Ltd. In the same case NCLAT cleared the object of this section where there was acquisition of Bhushan Power Steel Ltd by JSW Ltd.[6] in the same case It was held by the NCLAT that attachment of the assets of the CD by the Enforcement Directorate was illegal and without jurisdiction. Further, it was held that this section would apply retrospectively and also there is no need to make any declaration to come under Section 32A to get immunity. However, now the matter has ge to the apex court to decide the scope of this section.

Power of Government to notify Financial Service Providers

The IBC under Section 3(17) defines Financial Service Providers (FSP) which include non-banking financial companies and micro finance companies. Financial service providers were kept outside the purview of IBC until 2019 when the central government by the power vested in Section 227 notified FSP whose insolvency and liquidation will be conducted under the purview of the IBC.

Through the amendment of 2020 the central government has ascertained that the insolvency and liquidation of FSP will be in accordance to the procedure/ manner prescribed. Such FSP or categories of FSP are notified by the central government whose resolution and liquidation process is covered under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. These rules cover non-banking finance companies which have more than 500 Cr worth of assets as per last audited balance sheet. The amendment clarifies the status of and position of FSP in the code and also cast light on the power of central government and the role played by it.

Conclusion

The amendment to the code shows the proactive steps being taken by the legislature to fine-tune the code and aid in achieving the objective of the revival of the stressed companies.  The amendment tries to bring a balance between the interest of various stakeholders including the interest of individuals. It enlarges the scope of moratorium and ensures that during the period of moratorium the business of the corporate debtor will continue as a going concern because licenses, permits, grants, etc. cannot be terminated. Further, it tries the make the process speedy as after the amendment, IRP has to be appointed on the date of admission without any delay. Finally, the insertion of Section 32A which grants immunity will help in getting better resolution plans in the form of higher bids and more bidders. This will help India in creating an investor-friendly regime.

 Reference

[1] Pioneer Urban Land and Infrastructure Limited. V. Union of India, 2019 SCC Online SC 1005.

[2] Writ Petition Civil No.26/2020.

[3] MA 78/2018 in CP 1268/I&BC/NCLT/MB/MAH/2017.

[4]  Civil Appeal No. 9170 0f 2019.

[5] Section 16 (1) of the Insolvency and Bankruptcy Code, 2016.

[6] Company Appeal (AT) (Insolvency) No. 957 of 2019.

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