The present article discusses the major amendments introduced in the Insolvency and Bankruptcy Code, 2016 (IBC) by The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 dated December 28, 2019 (The Amendment Ordinance).
Immediate Appointment of Interim Resolution Professional
To make the period of 180 days more efficient, the window of fourteen days from insolvency commencement date, provided for appointment of interim resolution professional (IRP) has been removed. The amended subsection (1) of Section 16 of Insolvancy and Bankruptcy Code, 2016 (IBC) provides for appointment of IRP on the insolvency commencement date. Even the definition of Insolvency Commencement Date has been amended to date of admission of application for initiation of insolvency resolution process by Adjudicating Authority under section 7, 9 and 10 of the IBC.
The definition of interim finance under section 5(15) has been made more inclusive to include any other debt notified along with financial debt raised by the resolution professional during the insolvency resolution process.
New criteria for joint application by financial creditors
To initiate insolvency resolution process (CIRP) against a corporate debtor (CD) a financial creditor can make an application to the Adjudicating Authority under section 7 of IBC, on its own or jointly with other financial creditors. The Amendment Ordinance has prescribed requirement to make joint application by certain class of financial creditors and the minimum number of applicants as under:
1. Financial creditors referred under section 21(6A)(a)&(b) of IBC need to file an application for initiating CIRP jointly with one hundred such creditors of the same class or ten percent of total number of such creditors in the same class whichever is less.
2. Allottees under a real estate project need to file an application for initiating CIRP jointly with one hundred such allottees under same real estate project or ten percent of total number of such allottees in the same real estate project whichever is less.
3. All applications for initiating CIRP by above mentioned Financial Creditors,pending admission by the Adjudicating Authority before commencement date of the Amendment Ordinance i.e before December 28, 2019 shall be modified as per the new requirements within thirty days failing which it shall be deemed to be withdrawn before admission.
Provisions to Preserve Value of Corporate Debtor
• The Amendment ordinance omitted proviso to section 5(12) of IBC
• Proviso 1 to section 7(1) of IBC
• Proviso 2 section 7(1) of IBC
• Proviso 3 section 7(1) of IBC
• Clause (ia) of sub-section (2) of Section 240, IBC
• Proviso to sub-section (1) of section 23, IBC
• clause(1) of Explanation to sub-section(2) of Section 32A of IBC
The new set of provisions introduced aims to reduce the hurdles for IRP/RP in carrying the business of the corporate debtor as a going concern and prohibit any reduction in value of the Corporate Debtor.
The explanation inserted in sub-section (1) of section 14 prohibits Central government, state government, local authority or any authority constituted under any law from canceling any rights; license, permit, registration, quota, concession, granted to a Corporate Debtor on ground of insolvency if there is no default in payment of current dues for use or continuation of such rights.
The new sub-section (2A) to section 14 ensures supply of critical goods and services to CD during moratorium and also protects right of timely payment of suppliers. This new sub-section prohibits termination or suspension of supply of any goods or services which the IRP/RP considers critical to preserve value of the Corporate Debtor except where dues arising for such supply during moratorium are not paid or other circumstance specified.
In line with the amendments introduced, the IBBI has been empowered to make regulations prescribing circumstances under which supply of critical goods and services may be terminated, suspended or interrupted during the moratorium.
Continuous Tenure of RP
The resolution professional shall now continue to manage operations of the Corporate Debtor after expiry of the period of CIRP until and order approving resolution plan under section 31 or an order appointing liquidator under section 34 is made by the Adjudicating Authority.
Earlier in cases where the CIRP period expired before any application was made for approval of resolution plan or liquidation, the suo moto extension of tenure of RP was not clearly read out in the substituted proviso of section 23(1) and due to this authority of resolution professional to act on behalf of Corporate Debtor was unclear and tend to leave the CD and its assets in vulnerable condition.
Liability of Corporate Debtor for Offences
The Amendment Ordinance has introduced section 32A to safeguards genuine and new management of the CDfrom liabilities incurred on the CD by it’s ex-management. The concept of ‘lifting of corporate veil’ has been adopted in this provision to punish the perpetrators and enable the new management of the corporate debtor to efficiently execute the resolution plan and run the business. Following provisions are introduced:
1. Liability of the CD for an offence committed prior to commencement of CIRP shall cease and the CD shall not be prosecuted for such offence if approval of the resolution plan results in change of management or control of the CD to a person :
- who was not in management or control of CD or was related party of such a person
- who is not the one against whom investigating authority has reasons to believe that he abetted or conspired in commission of the offence On fulfillment of the above stated requirements any prosecution initiated against CD during CIRP shall also stand discharged.
2. List of persons who shall continue to be liable for prosecution and punishment for offence committed by CD prior to CIRP, even if liability of CD has ceased:
- “designated partner” under section 2(j) of Limited Liability Partnership Act, 2008; or
- “officer who is in default” as per section 2(60) of the Companies Act, 2013;or
- person who was in-charge, or responsible to the CD for conduct of its business; or
- person who was associated with CD in any manner;or person who was directly or indirectly involved in commission of such offence as per report or complaint filed by the investigating authority.
3. No action i.e attachment, seizure, retention or confiscation of property under law applicable to CD, can be taken against property of the CD in relation to offence committed prior to the CIRP, if such property is covered under a resolution plan approved under section 31 of IBC or sale of liquidation assets to a person who was not:
- Promoter or in the management or control of the CD or a related party of such person; or
- A person the investigating authority, based on records, believes to have abetted and conspired in commission of offence and against whom has submitted or filed relevant report or a complaint to the relevant statutory authority or court.
4. Irrespective of the immunity given to CD or any person in these provisions, all persons required to provide assistance under such law as applicable are bound to extend cooperation to any authority investigating the offence committed prior to CIRP.
Power of Central Government
An explanation is inserted to section 227 of IBC whereby it is clarified that CIRP and liquidation of financial service providers may be conducted in with such modifications and in such manners as prescribed by the Central Government. Further the rule making power of the Central Government for provisions of IBC is extended to following transactions as well:
1. Transactions under second proviso to section 21(2)
2. Transactions under Explanation I to section 29A(c)
3. Transactions under second proviso to Section 29A(j)
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