INSOLVENCY AND BANKRUPTCY (AMENDMENT) ORDINANCE, 2019

INTRODUCTION

The Insolvency and Bankruptcy Code (IBC) was introduced and implemented to consolidate the existing framework by creating a single law for insolvency and bankruptcy in India.

Until recently, the procedure of dissolving businesses was governed by the Companies Act of 1956, which was inefficient.[1] Fortunately, asa result of the Code's implementation, with the procedure being overseen by the National Company Law Tribunal (NCLT), it has resulted in rapid and prompt action during the early stages of a firm's financial default, resulting in an optimal recovery rate.

The Amendment Act of 2019 is important because it makes yet another step by the government to further furnish the existing legislation.

1. MODIFICATIONS MADE BY THE AMENDMENT ACT of 2019

I) Addition of an Explanation in Section 5 Clause 26

An explanation is now inserted in the definition of resolution plan under clause 26 of Section 5 of the Code to clarify that a resolution plan for the insolvency resolution of a corporate debtor may include provisions for the corporate restructuring of the debtor, including by way of merger, amalgamation and demerger.[2]

II) NCLT to Record Reasons For Delay in Disposing of Initiation Application: Section 7(4)

As per the Code, the National Company Law Tribunal or the NCLT after receiving an application for initiation of CIRP (corporate insolvency resolution process), must determine the existence of any defaults within the application; based on its finding, it is under their discretion to either accept or reject it. It must be kept in mind, however, that this process should be wrapped up within 14 days from the receipt of the application.

However, it so happens that in practice, there have been cases when the NCLT takes more than 14 days to decide on the application. Therefore, a provision has been added to ensure the speedy disposal and value maximization of the corporate debtors assets; it requires the NCLT to record its reasons in writing if an application is not disposed of within 14 days.[3]

III) Resolution Process (CIRP) to be Concluded within 330 Days: Section 12

Initially, according to the code, the insolvency resolution process had to be completed within 180 days, extendable by a period of up to 90 days. After the 2019 amendment however, the Code now states that it is to be compulsory for a CIRP to be completed within 330 days; this includes any extension of time granted and time taken under legal proceedings for the process.[4] It further also states that, any pending CIRPs that have been going on for over 330 days should be completed within 90 days from the date of commencement of the Amendment Act.

IV) Voting by Authorised Representative on behalf of Financial Creditors: Section 25A

To facilitate the decision making in the Committee of Creditors (CoC), especially in cases where the debt is owed to large group of financial creditors, the amendment provides that an authorized representative is to be representing such a group of creditors; this representative shall vote on behalf of all the financial creditors he or she represents in accordance with the decision approved by more than fifty percent of such financial creditors.[5] However, it is to be noted that, such will not apply in case of voting for withdrawal of CIRP.[6]

V) Treatment under Resolution Plan: Section 30

Originally, the Code had prescribed that the amounts paid to operational creditors under a resolution plan shall not be less than what they would have received in an event of liquidation.[7] The Act has now been amended to contain a new requirement; it states that the payment received by the operational creditors must not be less than,[8]

a) the amount such creditors would have received in an event of liquidation of the corporate debtor under Section 53 or

b) the amount such creditor would have received, if the amount to be distributed under the resolution plan had been distributed in accordance of priority as specified under Section 53(1)

The amendment also adds that the payments to financial creditors who vote against a resolution plan will be determined as per the regulations set by the Insolvency and Bankruptcy Board of India; that being true, payment amount should not be less than the amount that would have been paid to such creditors in case of liquidation of the corporate debtor. It must be noted that, this provision also apply in cases where,

a) NCLT has not approved or rejected a resolution plan

b) An appeal has been submitted before the Supreme Court or National Company Law Appellate Tribunal, or such motion is not time-barred under any provisions of the law for the time being in force; or[9]

c) A legal proceeding has been initiated in a court challenging the decision of the NCLT in relation to a resolution plan

Besides this, the amendment also requires that the manner of distribution of claims must consider the order of priority amongst creditors, as well as in the scenario of liquidation waterfall under Section 53 of the Act; it would further also include the priority and value of the security interest of a secured creditor.

VI) Resolution Plan to be Binding on all Stakeholders: Section 31(1)

Before the Amendment, the approved resolution plan was only binding on the corporate debtor and its employees, creditors, members, guarantors and other stakeholders included in the resolution plan; however, this would often lead to situations where Government used to follow up for the balance dues after the said approval of resolution plan, causing delay in the process.

Therefore, with an aim to reduce and discourage delay, Section 31(1) of the Act after amendment now states that any NCLT-approved resolution plan will be binding on the Central Government, State Government and any local authority to whom a corporate debtor owes a debt in respect of payment of dues arising under any law.[10]

VII) Liquidation before Resolution: Section 33(2)

After the Amendment Act of 2019, Section 33(2) of the Code now holds that if the resolution professional at any time during the CIRP but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors (approved by not less than sixty-six per cent) to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order.[11]

In addition, it is stated in the explanation that succeeds clause (2) of Section 33 that, committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.

CONCLUSION

In the end, the INSOLVENCY AND BANKRUPTCY (AMENDMENT) ORDINANCE, 2019 serves as a significant step in improving India's insolvency and bankruptcy structure. The amendments not only address critical aspects deemed to be lacking of the Code but also underscore a sense of commitment to make it more efficient in the future.

REFERENCES

1. Is IBC 2016 Effective?, India, available at: https://www.niti.gov.in/ibc-2016-effective (last visited on December 29, 2023).

2. The Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), s. 5.

3. The Insolvency and Bankruptcy Code (Amendment) Act, 2019, India, available at: https://www.indialawoffices.com/legal-articles/the-insolvency-and-bankruptcy-code-act-2019 (last visited on December 29, 2023).

4. The Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), s. 12.

5. The Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), s. 25A.

6. Supra note 3.

7. IBC Amendments 2019, India, available at: https://www.indiafilings.com/learn/ibc-amendments-2019/ (last visited on December 30, 2023).

8. The Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), s. 30.

9. Supra note 7.

10. The Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), s. 31.

11. The Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), s. 33.