1. Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (Ordinance) had come into effect from 28th December 2019 after getting the assent from the Hon'ble President. The said Ordinance has amended various provisions of Insolvency and Bankruptcy Code 2016 (I&B Code, 2016/Code)
Changes brought under the ordinance are as below:
(i) Change in the insolvency commencement date
Section 5(12) of the Code defines 'insolvency commencement date,' and provided that in case the interim resolution professional is not appointed while admitting the application under Section 7, 9 or 10 of the Code for initiating the CIRP, the insolvency commencement date would be the date on which such interim resolution professional is subsequently appointed. However, this created confusion, which leads to various interpretations being evolved.
To rest the issue in peace, the ordinance deleted the aforesaid provision implying that the insolvency commencement date shall be the date when the application gets admitted even if the interim resolution professional ("IRP") is not appointed by the Adjudicating Authority in the order admitting the CIRP application.
Further, in order to bring in line with the proposed amended definition as above of the insolvency commencement date, Section 16(1) of the Code has been amended making it mandatory for the IRP to be appointed on the insolvency commencement date itself by the Adjudicating Authority. Before this amendment, the IRP was to be appointed within 14 days from the insolvency commencement date.
(ii) Initiation of corporate insolvency resolution process by a class of financial creditors
After statutory recognition being given to home buyers of real estate projects as Financial Creditors, it leads to the opening of the Pandora's Box as single allottee started proceeding with filing the application for initiation of the CIRP against the real estate company. To deal with this, provisos have been added to Section 7 of the Code which provides that an application for initiation of CIRP may be filed jointly by the financial creditors. The application may be made by not less than 100 of such creditors in the same class or not less than 10% of the total number of creditors in that class (whichever is less).
In case of allottees of real estate projects, the application may be made by not less than 100 of such allottees under the same real estate project or not less than 10% of the total number of allottees under the same real estate project (whichever is less).
The applications made before the commencement of this Ordinance were also required to be modified to comply with the proposed first or Second proviso within 30 days of commencement of this Ordinance, failing which the application shall be deemed withdrawn before its admission.
Here, it is important to mention that the said amendment has been challenged is pending before the Hon'ble Supreme Court of India.
(iii) Initiation of CIRP by Corporate Debtor against another Corporate Debtor
Section 11 of the I&B Code prevents certain persons from making an application under the Code for initiation of CIRP, an explanation has been added whereby a Corporate Debtor, even though covered under clauses (a) to (d) of Section 11 may initiate CIRP against another corporate debtor. Hence, CIRP against another Corporate Debtor may be initiated by a Corporate Debtor who:
- is undergoing CIRP;
- has completed CIRP 12 months before the date of making such an application;
- has violated the terms of a resolution plan which was approved 12 months before making such an application;
- in respect of whom a liquidation order has been made.
(iv) Moratorium not to have any effect on the use of licenses issued under Authority
In order to maintain the object of the Code, which is for maximization of the assets of a corporate debtor and to enable a corporate debtor to continue as a going-concern even after commencement of CIRP, the Ordinance provides to add an Explanation under Section 14 of the Code ("Moratorium"), sub-section (1). As per the Explanation, any license, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority or any other sectoral regulator shall not be suspended or terminated on the grounds of the insolvency, provided that there is no default in payment of using such permission.
This Explanation has been introduced so as to ensure that the initiation of CIRP does not affect the corporate debtor from carrying its business by the cancellation of such licenses, permits, registrations, etc. It was observed, on CIRP being initiated under the Code, such licenses, permits, and other authorizations were being canceled by various regulatory authorities issuing them in the first place. This lead to the defeat of the foremost intent of the statute, as upheld by the adjudicating authorities, of assisting the corporate debtor to retain its going-concern status. Hence, the aforesaid Explanation was introduced to prevent the cancellation of the authorizations required for continuing the operations of the corporate debtor.
(v) No termination of supply of goods or services on the declaration of the moratorium; except in case of default
Under Section 14 of the Code, a new sub-section (2A) has been introduced whereby, on declaration of moratorium, if the Resolution Professional is of the opinion that the supply of goods or services are important to protect and preserve the value of the corporate debtor and to manage the operations of such corporate debtor as a going concern, then such supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium provided that the corporate debtor has not made any defaults in respect of payment of dues of such supplies during the moratorium period.
This insertion is again made with a view to continuing the corporate debtor as a going concern. By ensuring that the goods and services are continued to be supplied without any interruptions, shall enable the corporate debtor to run its operations as a going concern.
Prior to this, sub-section (2) only provided an uninterrupted supply of essential goods or services to the corporate debtor during the moratorium period. Hereinafter, the RP may allow goods and services to be continued to be supplied to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern.
(vi) Non-applicability of Moratorium
As given under the Ordinance, provisions of moratorium under Section 14(1) shall not be applicable to transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.
Before this ordinance, this was only provided for transactions notified by the Central Government in consultation with any financial sector regulator.
As per this amendment, the scope of the inapplicability of the provisions of the moratorium period has been extended to such transactions as may be notified by the Central Government in consultation with any other authority as well. Henceforth, such transactions, as the Central Government may deem fit shall be not be affected by the imposition of the moratorium.
(vii) Continuity of office of the resolution professional
Under Section 23 of the Code that provides for conducting the entire corporate insolvency resolution process and managing the operations of the corporate debtor during the CIRP, the proviso to sub-section (1) states that the Resolution Professional shall continue to manage the affairs of the Corporate Debtor after the expiry of CIRP period until a resolution plan submitted to the AA is approved.
The Ordinance has substituted the above proviso, which provides that the RP shall continue to manage the operations of the Corporate Debtor after the expiry of the CIRP period and until the AA passes an order to either approve the resolution plan or appoint a liquidator.
Hence, after this proviso, the RP shall continue to be responsible for the affairs of the corporate debtor for the time period beginning after the conclusion of the CIRP and up to the time when either a successful resolution plan has been approved by the AA or a liquidator has been appointed by the AA.
(viii) Shielding the new management and providing immunity to the assets of the Corporate Debtor after the successful resolution plan against the consequences of prior offenses
A new section after section 32 of the Code has been inserted i.e. Section 32A. As per this newly inserted section, the liability of a corporate debtor for an offense which was committed prior to the commencement of the CIRP shall be ceased and such corporate debtor shall not be prosecuted for such an offense if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not:
- A promoter or in the management or control of the corporate debtor or a related party of such a person; or
- A person with who was believed to have abetted or conspired for the commission of the offense, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.
However, if a prosecution against the corporate debtor is instituted after the initiation of CIRP, then, in that case, the corporate debtor shall be discharged of such liability from the date of approval of the resolution plan subject to fulfillment of a few conditions.
Sub-section 32A (2) provides that no action shall be taken against the property of the Corporate Debtor in relation to an offense committed prior to the commencement of the CIRP of the Corporate Debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority (NCLT) under Section 31 of the Code, which results in the change in control of the corporate debtor.
2. Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020
The Insolvency and Bankruptcy Board of India ("IBBI") has notified the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020 with effective from 6th January 2020 to amend the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Key highlights of the Amendment Regulation are as under:
(i) Persons ineligible under the Insolvency & Bankruptcy Code shall not be a party in compromise or arrangement under section 230 of the Companies Act, 2013:
Section 29A was introduced in the Code, to enumerate certain persons who were not eligible to be resolution applicants and thus could not submit a resolution plan for the corporate debtor. The proviso to section 35(1) (f) of the Code mandates that a Liquidator shall not sell the immovable and movable property or actionable claims of the CD in liquidation to any person who is not eligible to be a resolution applicant. These provisions were inserted in the Code with effect from 23rd November 2017.
However, there was no explicit prohibition on persons ineligible to submit resolution plans under section 29A from proposing compromise or arrangement under section 230 of the Act, which may result in person ineligible under section 29A from acquiring control of the Corporate Debtor.
The Hon'ble National Company Law Appellate Tribunal in the matter of Jindal Steel and Power Limited v. Arun Kumar Jagtramka & Anr. [Company Appeal (AT) No. 221 of 2018], passing judgment on 24.10.2019 held that in a Liquidation proceeding under the Code, a petition under Section 230 to 232 of the Companies Act is maintainable. The Hon'ble Appellate Authority further stated and clarified that:
- Rule 6: Application by Guarantor (Debtor) under Section 94 of the I&B Code 2016 is to be made in Form A, along with an application fee of two thousand rupees (INR 2000/-) only.
- Rule 7 (1): Demand Notice by a Creditor as per Section 95(4) (b) shall be served on the guarantor in Form B.
- Rule 7(2): In case after serving of the Demand Notice as per the provisions of Section 95(4)(b) read with Rule 7(1) of the Adjudicating Authority rules 2019, there is a failure on the part of the debtor to pay the debt within a period of fourteen days of the service of the notice of demand, then an application can be made in Form C, along with a fee of two thousand rupees (INR 2000/-) only.
- Rule 11: Withdrawal of Application: The Adjudicating Authority may permit withdrawal of the application as filed w.r.t personal guarantor under Section 94 (corresponding rule 6) or Section 95 (corresponding rule 7(2)) either before its admission, on a request by the applicant or after its admission, on the request by the applicant, if ninety percent of the creditors agree to such withdrawal. The withdrawal application needs to be as per the format provided in Form D.
"during the period of Liquidation, for the purpose of Section 230 to 232 of the Companies Act, the 'Corporate Debtor' is to be saved from its own management, meaning thereby the Promoters, who are ineligible under Section 29A, are not entitled to file application for Compromise and Arrangement in their favor under Section 230 to 232 of the Companies Act."
In view of the above, the Amendment Regulations added a proviso to Regulation 2B(1) stating that a person, who is not eligible to submit a resolution plan for insolvency resolution of the corporate debtor under the provisions of the Insolvency & Bankruptcy Code ("IBC"), shall not be a party in any manner to a compromise or arrangement of the corporate debtor under section 230 of the Companies Act, 2013.
Further in the matter of State Bank of India v. Anuj Bajpai (Liquidator), the Hon'ble NCLAT in its judgment passed on 18.02.2019 held that secured assets of a Corporate Debtor could not be sold back to the Promoters of the Corporate Debtor.
Hence, the Amended Regulations inserted sub-regulation (8) in regulation 37 that states that a creditor cannot sell or transfer an asset, which is subject to a security interest, to any person, who is not eligible under the IBC to submit a resolution plan for insolvency resolution of the corporate debtor.
(ii) Obligations of a secured creditor who proceeds to realize its security interest
The Amendment Regulation provides that a secured creditor, who proceeds to realize its security interest, shall contribute its share of the insolvency resolution process cost, liquidation process cost, and workmen's dues, within 90 days of the liquidation commencement date. Further, it shall also pay an excess of realized value of the asset, which is subject to a security interest, over the number of its claims admitted, within 180 days of the liquidation commencement date. Where the secured creditor fails to pay such amounts to the Liquidator within 90 days or 180 days, as the case may be, the asset shall become part of Liquidation Estate.
(iii) Corporate Liquidation Account.
The Amendment Regulation provides that a Liquidator shall deposit a number of unclaimed dividends if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon into the Corporate Liquidation Account before he submits an application for dissolution of the corporate debtor. It also provides a process for a stakeholder to seek withdrawal from the Corporate Liquidation Account.
3. Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) (Amendment) Regulations, 2020
The Insolvency and Bankruptcy Board of India ("IBBI") has notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) (Amendment) Regulations, 2020 with effective from 15th January 2020 to amend the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017. The said amendment required a Liquidator to deposit the number of unclaimed dividends if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon into the Corporate Voluntary Liquidation Account ("Account"), maintained by IBBI, before he submits an application for dissolution of the corporate person. In case, a Liquidator fails to deposit any amount into the Account under this regulation, then he shall be required to deposit the same along with interest thereon at the rate of 12% p.a from the due date of deposit till the date of deposit. It also provides a process for a stakeholder to seek withdrawal from the Corporate Voluntary Liquidation Account. With respect to the Account:
- IBBI shall maintain a corporate person-wise ledger of the amount deposited into and the amount withdrawn from the Account
- IBBI shall nominate an officer of the level of Executive Director of IBBI as the custodian of the Account and no proceeds shall be withdrawn without his approval.
- IBBI shall maintain proper accounts of the Account and get the same audited annually.
(i) Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2020
The Insolvency and Bankruptcy Board of India ("IBBI") has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2016 vide notification dated 12th February 2020, effective from the date of their publication in the Official Gazette.
IBBI vide this notification has amended Regulation 40B, wherein sub-regulation (4) has been substituted. 40B provides for filing of forms with respect to each stage and period covered under the Code, by the insolvency professional, interim resolution professional or resolution professional, as the case may be on an electronic platform of the Board, as per the timelines stipulated against each Form with respect to each stage and period covered under the Code.
Post this substitution, the delay in filing of any form under Regulation by the Insolvency Professional, Interim Resolution Professional or Resolution Professional, whether by correction, updation or otherwise, shall lead to a fee of INR 500 per Form for each calendar month of delay after 1st April 2020. Hereinafter, a Form filed after 30th April 2020 that is from 1st May 2020 shall attract a fee of INR 500. Before this amendment, the fee was the application for each calendar month of delay after 1st January 2020.
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