While the Code has seen its ups and down, since its enactment, the recent cases including the twelve large accounts identified by Reserve Bank of India had underlined several practical issues and interpretational inconsistencies under the Code which led to formation of an insolvency law committee constituted by the Ministry of Corporate Affairs. Based on the recommendations of the insolvency law committee certain amendments were suggested to the Code. Brief overview of the major amendments to the Code in the year 2018 are discussed hereinafter.
Home buyers as Financial Creditors
One of the most important and significant change brought about in the Code is to treat home buyers as Financial Creditors, since it was being seen that the home buyers were being left out when it came to be a part in the decision making process for any Corporate Debtor undergoing the Corporate Insolvency Resolution Process ("CIRP") under the Code. The effect of the same is that homebuyers will now form a part of the committee of creditors ("COC") of a Corporate Debtor. This change is a welcome step in protecting the interest of the home buyers.
Voting thresholds for decision making by the COC
The threshold for voting as per the amendment has now been lowered to 66% as against 75% earlier for major decisions like approval of resolution plan, extension of the time period for the completion of the CIRP, replacement of the Resolution Professional.
Applicability of moratorium to guarantors
The amendment has elucidated that the personal assets of guarantors would be outside the purview of the moratorium.
Section 29A of the Code
Section 29A was inserted in the Code to restrain promoters and directors their relatives to come back into the control of the Corporate Debtor, directly or indirectly, at reduced liability levels. Amendments to section 29A have been introduced to bring more clarity to the eligibility criteria for submission of resolution plan. The amendment also brings relief to the MSME’s by relaxing certain provisions of section 29A for them.
Withdrawal of CIRP with the approval of 90% of COC members
Under the amendments, withdrawal of an application after admission of application is possible now, subject to being approved by at least 90% of the COC members.
Other Amendments to the Code
The definition of "Relative" was not provided in the Code and reliance was being placed on the definition provided in the Companies Act, 2013. This gap has now been addressed in the amendments.
Several important changes have also been brought in the Code, qua the process regarding approval of resolution plans. Post amendments, the Adjudicating Authority (NCLT) will now be reviewing the merits of the resolution plan and satisfy itself for an effective implementation.
Under the amendments, other approvals required under any other law, in pursuance of the resolution plan, shall be obtained within a maximum period of one year from the approval of the resolution plan.
Special Resolution of shareholders is a pre-requisite now before filing an application by the Corporate Applicant himself under the Code.
Few important cases under the Code in 2018
In Binani Industries Limited v/s Bank of Baroda & Anr, the NCLAT has held that the maximisation of the value assets of Corporate Debtor cannot be ignored and interest of all stakeholders are to be taken into account in the resolution plan.
In B.K. Educational Services Private Limited v/s Parag Gupta and Associates, the Apex Court held that Limitation Act, 1963 will apply to applications filed by Financial Creditors and Operational Creditors under sections 7 and 9 of the Code.
In Quinn Logistics India Pvt. Ltd. v/s Mack Soft Tech Pvt. Ltd, the NCLAT has enlisted various instances which warrant the exclusion of certain periods for the purpose of calculating the period of 270 days under the Code.
In the matter of Precision Fasteners Limited undergoing liquidation, the Mumbai NCLT while directing that the attachment orders passed by the Employees Provident fund Organisation were to be vacated, it also held that priority shall be given to Provident Fund dues against the unpaid dues of the creditor.
In Arcelor Mittal India Private Limited v/s Satish Kumar Gupta and Ors, the Hon’ble Supreme Court has interpreted important concepts like lifting the corporate veil, management and control, qua Section 29A of the Code also sheds light strict compliance of timelines under the Code.
Adoption of the UNCITRAL Model Law on Cross-Border Insolvency under the Code
The Insolvency Law Committee has recently submitted its Report on Cross Border Insolvency to the Ministry of Corporate Affairs so as to adopt the UNCITRAL Model Law under the Code. The Model Law, if and when adopted under the Code would majorly deal with cross-border insolvency cases, allowing foreign creditors to participate in domestic insolvency proceedings against a defaulting debtor, recognition of concurrent foreign proceedings and synchronization to the principles of Comity of Courts.
The Model Law when adopted under the Cross Border mechanism under the Code would give an impetus to many Indian companies who have company’s registered outside India and to foreign companies have their presence in India.
Challenges Interim Resolution Professional (IRP) / Resolution Professional (RP) continue to face
On admission of an application under the Code, an IRP is appointed who is required to perform its duties prescribed under the Code. However, there are many practical challenges as enlisted below that an IRP faces while working towards the resolution process:
- Non co-operation of creditors at times;
- IRP’s hurdle to work around incomplete records of the corporate debtor, pending compliances/statutory filings,
- Nonchalant attitude of employees/officers of the corporate debtors; logistical challenges to perform duties; non co-operation of the Promoters/Directors of corporate debtor and
- IRPs/RP’s battle to manage the day to day requirements of the corporate debtor.
New delisting norms for companies undergoing the CIRP under the Code
The Securities and Exchange Board of India has given clarity to acquirers of insolvent companies under the Code and has provided relaxations with respect to the delisting norms. The resolution plan would lay down procedure to complete delisting of shares, or determine the exit option to existing shareholders at a specified price.
Exit to the shareholders should be at a price which shall not be less than the liquidation value as determined under the Insolvency Resolution Process for Corporate Persons Regulations, 2016 after paying off dues in the order of priority as defined under Section 53 of the Code. These would be viewed as a welcome change for the bidders acquiring insolvent companies.
Addressing the growing litigation around the resolution process under the Code
The Code provides for completion of resolution process within a maximum period of 270 days. However, in the recent past, the deadline is seeming to be weakened due to the various litigations filed by the large corporate houses undergoing resolution process.
Taking into account the challenges faced by these on-going litigations, thereby causing delays in implementing the repayment/resolution plans, the Government of India in its initiative under Project Sashakt is trying to come out with the framework to deal with such issues/challenges. Under this framework, for loan amount from 50- 500 crore, the borrowers and lenders would work jointly and allow the borrower to submit resolution plan for repayment. For loans above 500 crore, banks will have to set up an Asset Management Company under which there will be multiple sector-specific Alternative Investment Funds (AIFs). These funds will invest in the stressed assets bought by existing Asset Reconstruction Companies (ARCs). The ARCs will then use the funds to redeem security receipts issued to banks against the bad loans.
For timely resolution and cutting costs, the Government recently is also exploring the feasibility of introducing pre-packaged bankruptcy scheme. The scheme is already prevalent in countries like USA. If introduced, the scheme would be resorted to for the purpose of resolution, even before entering into the framework under the Code. The scheme would give power in the hands of stressed company to prepare a financial resolution plan for itself, subject to approval of two-thirds of creditors. The resolution plan then can be submitted to NCLT for its approval. This scheme, if implemented may be helpful in avoiding litigations under the Code.
Devesh Juvekar, Partner, Rajani Associates
Dikshat Mehra, Senior Associate, Rajani Associates