The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018
31 July 2018
The Indian Ministry of Law and Justice published the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ordinance) in the Official Gazette of India on 6 June 2018.
The Ordinance amends the Insolvency and Bankruptcy Code, 2016 (IBC). All the sections of the Ordinance have come into force.
This update addresses the major changes to the IBC effectuated by the Ordinance.
The Ordinance was promulgated by the President of India on the recommendation of the Union Cabinet.
The Ordinance is a temporary law which enables the government to take immediate legislative action when the parliament is not in session. The Ordinance will cease to be effective if not approved by the parliament within 6 (six) weeks of reconvening.
The major changes brought out in the IBC, as a result of the Ordinance, are set out below:
Definition of “financial debt” : The Ordinance has expanded the meaning of ‘financial debt’ under the IBC to include amounts received from allottees under real estate projects. This implies that allottees under real estate projects are financial creditors and will be able to initiate the corporate insolvency process in the event of a default under the IBC.
This development, combined with the provisions of the Real Estate (Regulation and Development) Act, 2016 has ensured that there is ample protection for home-owners from errant developers.
Definition of “related party” : The Ordinance has provided a very comprehensive definition of the term “related party” in relation to an individual in Section 5(24A) of the IBC. Prior to the Ordinance, the term ‘related party’ was defined in the IBC only in relation to a corporate debtor and was generally used in that context. However, in Sections 28 and 29 of the IBC, the term was used in a manner which implied related party in the context of individuals (such as a promoter or a director), but the term was not defined in that context. The inclusion of Section 5(24A) solves this issue. The implication of the inclusion of this definition is that relatives of the promoters of a company facing insolvency will be unable to submit a resolution plan under the IBC.
Ability to withdraw application : The Ordinance provides for the ability to withdraw an application for initiation of a corporate insolvency process after it has been admitted by the National Company Law Tribunal (NCLT). Prior to the Ordinance, an application could only be withdrawn prior to being admitted by the NCLT.
Applicability of limitation : The Ordinance has introduced a new section, being Section 238A, which has now clarified that the provisions of the Limitation Act, 1963 will be applicable in proceedings before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal and the Debt Recovery Appellate Tribunal. This has attempted to clear long standing confusion on this issue where there were contradictory views from various benches of the NCLT and the National Company Law Appellate Tribunal.
Lowering of voting thresholds : The Ordinance has reduced the voting threshold for taking decisions by the Committee of Creditors from 75% to 51%. This will make taking decisions by the Committee of Creditors easier. In certain critical matters, the voting threshold has been revised from 75% to 66% such as in case of replacement of the insolvency professional.
However in order to withdraw an application for the corporate insolvency process, the approval threshold has been kept to 90% of the Committee of Creditors.
Authorized representatives : The Ordinance stipulates that in cases where the financial debt is in the form of securities or deposits and the terms of the financial debt allows for the appointment of a trustee or agent to act as the authorized representative of a group of creditors, or where a class of creditors exceeds a specified number, a person may be appointed to act as authorized representative. This authorized representative shall act only in accordance with prior instructions.
Transfer of winding up proceedings : The Ordinance has introduced a proviso to Section 434 of the Companies Act, 2013 which allows the transfer of winding up proceedings currently pending before a High Court to the NCLT, where the transferred cases will be treated as an application for the initiation of corporate insolvency process.
Certificate from financial institution : The IBC, prior to the Ordinance necessarily required every operational creditor applying for a corporate insolvency process to produce a copy of a certificate from the financial institutions maintaining the accounts of the operational creditor certifying that the operational debt remains unpaid by the corporate debtor. This requirement has now been made optional in light of the practical difficulties in obtaining such a certificate.
Criteria for submitting resolution plan : The Ordinance has amended the eligibility criteria for being able to submit a resolution plan as set out under Section 29A of the IBC. A person who is convicted for an offence punishable with more than 7 (seven) years imprisonment under any act and more than 2 (two) years imprisonment under certain specified acts will be ineligible for submitting a resolution plan.
Requirement of special resolution : Section 7 of the Ordinance amends Section 10 of the IBC to make it mandatory for every corporate applicant seeking to initiate a corporate insolvency process to pass a special resolution approving such action.
Extension of term of IRP : The Ordinance has extended the term of the interim resolution professional (IRP). Whereas prior to the Ordinance the term of the IRP was only for a period of 30 (thirty) days from appointment, it has now been changed to extend up the appointment of the resolution professional by the Committee of Creditors.
Moratorium period : Another clarificatory change brought about by the Ordinance is that the moratorium period under Section 14 will not apply in case of the surety in contract of guarantee to the corporate debtor. The moratorium period under section 14 has been instituted in order to protect the property of the corporate debtor and accordingly should not apply to the property of a guarantor.
The Ordinance has addressed some of the major issues with the IBC and is a welcome relief for litigants. As opposed to waiting until the parliament is back in session to pass the changes as an amending act, the Ordinance has ensured that the changes that were required to the IBC have been carried out without any kind of delay.
The changes brought about by the Ordinance are of three kinds: (i) Clarificatory, (ii) Curative and (iii) Substantive.
It remains to be seen if the Ordinance will be accepted “as is” when the Parliament is back in session.