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Breaking down IBC 2020: Need of the hour or a miscalculated step

Written by: Diganta Paul, Student, National Law University, Odisha

(PC. The Economic Times)


On 13th March, 2020, the Government of India made the 3rd amendment to the Insolvency and Bankruptcy code, 2016. The main changes in IBC 2020 (amendments) includes – increasing of the threshold for initiating a resolution process (Section 7); the corporate debtors being entitled to file an insolvency application against another corporate debtor (Section 11); the rules regarding licenses/permits during the moratorium period (Section 14); clarification with respect to the insolvency commencement date (Section 16) and defining the liabilities for prior offences (Section 32A). This article shall discuss such keys amendments in detail and its implications to the current scenario.

The first important change includes the amendment of section 7, which states that, a minimum of 10% of homebuyers or 100, whichever is lower, is required to initiate an insolvency resolution proceeding against the Corporate Debtor. Homebuyers were included within the purview of financial creditors under the 2018 amendment. This was challenged in the Supreme Court in the landmark case of Pioneer Urban Land and Infrastructure Ltd. & Anr. v Union of India, where the Apex court upheld the constitutional validity of section 5(8)(f) of the IBC. Section 5(8)(f) states that, any amount raised from a real estate allottee, shall be deemed to have the commercial effect of a borrowing. As per the apex court, since homebuyers or allottes give advances to the real estate developer and thereby finance the project at hand, they are really financial creditors[1]. The court also stated that, henceforth the home buyers can approach the court in case of any dispute, either through RERA (Real Estate and Regulatory Authority) or IBC, where RERA is to be read harmoniously with the Code and that the Code will prevail over the RERA in the event of any conflict. But this recent amendment of introducing a minimum threshold, might affect the homebuyers who will now struggle to meet the required limit to file an application through IBC which might lead to a further erosion of demand in the real estate market amidst the economic cringe that the people are facing due to the COVID-19 pandemic. The government, has also increased the threshold for default for filing an insolvency application from Rupees One Lakh to One Crore to give some relaxation to the debtors due the Coronavirus outbreak, so that, the can bounce back and save them from being insolvent due to the economic crisis that the country is facing.

The second important change pertains to the amendment made to section 11, where along with the existing Explanation I, Explanation II has been added. It states that, any corporate debtor that comes under the clauses (a) to (d) as described in section 11, will not be barred to initiate a corporate insolvency resolution process against another corporate debtor. With the insertion of this explanation which will be given an retrospective effect, as it is just a clarification for clarity of doubts. From now on, a liquidator and resolution professionals can initiate a Corporate Insolvency Resolution Process against another corporate debtor who owes to the corporate debtor, who had defaulted in terms of the Insolvency and Bankruptcy Code.

The third change being the amendment to section 14, where an Explanation has been added to sub-section (1) of the said section, stating that any kind of license, permit, registration etc. given by the appropriate authority shall not be suspended/terminated on the grounds of insolvency. There has been also an additional insertion of a new sub-section (2A), which states that, when the company is undertaking any supply of goods/services which is critical as to not diminish the value of the corporate debtor, then such supply shall not be terminated/suspended during the moratorium period, except if the dues which the corporate debtor has not paid arises from such act of supply. This will allow the company in debt, not to be collapsed due to the filing of the insolvency petition which might attract new investors in order to revive it. It will also be helpful in terms of not harming its customers and preserving the core business areas on which the company runs, thereby keeping the business alive as usual. Although, it might stand as a concern for the MSMEs that will be compelled to supply goods to a debt-ridden company.

The fourth important change concerns the amendment to section 16, where the time limit of appointing an interim resolution professional within fourteen days from the insolvency commencement date has been reduced to the date the insolvency was commenced. This amendment is a relief for the financial creditors, as it will allow the resolution process to be faster and smoother, thereby helping in clearing the dues that are being owed by the corporate debtor to its creditors. In many cases, the applicants doesn’t name their Insolvency Professional in their applications which sometimes leads to delay in the appointment of the interim resolution professional after the case is admitted by the Adjudicating Authority. To avoid such delays, an amendment to section 16 of the Code was carried out[2]. Since the Resolution Professional is to be admitted on the day the Insolvency Proceeding starts, it will increase the efficiency and help to complete the proceedings in a time-bound manner. The stakeholders will be made to follow a strict timeline and also all the paperwork will need to have been done before the commencement of the proceeding. This will enable a better approach at the revival of the company, as time will be counted from the day of the commencement of the proceedings[3].

The last major change is with respect to the amendment of section 32, wherein, a new section has been inserted i.e section 32A. It states that no new corporate debtor can be punished for the offence committed prior to the commencement of the corporate insolvency resolution and such corporate debtor shall not be prosecuted by the authorities under section 31. This amendment is a boon for new investors and management that is willing to take over a debt-ridden company as it ensures, that the previous liabilities of the corporate debtors are not passed to the new management and does not affect the takeover. This amendment seems to come into place due to the landmark case of JSW Steel Limited’s (JSW) resolution plan for taking over Bhushan Power & Steel Ltd (BPCL). In this case, shortly after the resolution plan of JSW Steel Ltd was passed by the adjudicating authority with certain modifications, the Directorate of Enforcement of Central Government (ED) attached the assets of BPCL under the Prevention of Money Laundering Ac, 2002. JSW raised concern and challenged such action of the ED. While the appeal of JSW was pending, the IBC (Amendment) Ordinance, 2019 was promulgated. But the ED took the stance that, as JSW being a related party, it is not entitled to the benefits that are mentioned in Section 32A of IBC. But the NCLAT rejected the ED’s argument and held that the Ed’s attachment was illegal and without jurisdiction. The NCLAT stated that BPCL’s assets are immune from attachment, as it has already passed its resolution plan from the adjudicating authority. The said case is currently challenged before the Supreme Court and is sub-judice.

Therefore these major changes can impact everyone including the corporate debtors and creditors along with new investors willing up to takeover companies in debt or have been declared insolvent. Although the bill is equipped to remove the blockages and smoother the corporate insolvency resolution process, it needs more scrutiny to cover up the loopholes and the shortcomings in the IBC, as it will be one the major game-changer laws to the Indian market in the future.


References

[1] Samanwaya Rautray, IBC: SC upholds homebuyer’s rights as financial creditors, The Economic Times, Aug 10, 2019.<https://economictimes.indiatimes.com/news/economy/policy/sc-upholds-amendments-to-insolvency-code/articleshow/70600698.cms?from=mdr#:~:text=Section%205(8)(f,financial%20creditors%2C%20the%20court%20held.> [2] Dr. (h.c) Advocate Mamta Binani, Insolvency and Bankruptcy Code (Amendment) Act, 2020, <http://ipaicmai.in/IPANEW/Uploadfiles/LatestHome/LH_01042020012558.pdf> [3] Vinod Kothari Consultants, Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 Quick review of Proposed Amendments, <http://vinodkothari.com/2019/12/ibc-second-amendment-bill-2019-quick-review/>

Opinions expressed in the blogs are the sole responsibility of the author(s) and do not necessarily reflect the views of The L Word Blog.

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