Cabinet Approves Ordinance to Amend Insolvency & Bankruptcy Code : Civil Services Mentor Magazine: JANUARY - 2018
::Cabinet Approves Ordinance to Amend Insolvency & Bankruptcy
India was lacking the legal and institutional machinery for dealing with
debt defaults as per the global standards. The recovery proceedings by
creditors, either through the Contract Act or through special laws such as
the Recovery of Debts due to Banks and Financial Institutions Act, 1993 and
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, has not had desired outcomes. Similarly, action
through the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
and the winding up provisions of the Companies Act, 1956 have neither been
able to aid recovery for lenders nor restructuring of firms. Laws dealing
with individual insolvency, the Presidency Towns Insolvency Act, 1909 and
the Provincial Insolvency Act, 1920, were almost a century old. This has
hampered the confidence of the lender and development of the credit markets
in India. Resultantly, credit by banks is the largest component of the
credit market in India and corporate bond market has not yet developed to
the desired level.
The Government decided to embark on a fundamental and systemic reform
which would address this problem, both commercially and judicially. The idea
was to come up with a comprehensive solution, which would encompass
borrowing by firms and by individuals. In recognition of the fact that major
sub-components of lending are done by non-banks, in particular the corporate
bond market which serve infrastructure projects, bankruptcy reforms needed
to have a consistent treatment of default. While the systems of well
-functioning advanced economies were studied, the design that was
implemented for India reflects a careful judgment about what would work
under India conditions.
The Insolvency & Bankruptcy Code Aimed to consolidate the laws relating
to insolvency of companies and limited liability entities(including limited
liability partnerships and other entities with limited liability), unlimited
liability partnerships and individuals, presently contained in a number of
legislations, into a single legislation and provide for their reorganization
and resolution in a time bound manner for maximization of value of their
assets. Such consolidation will provide for a greater clarity in law and
facilitate the application of consistent and coherent provisions to
different stakeholders affected by business failure or inability to pay
debt. This law will thus promote entrepreneurship, availability of credit
and balance the interest of all stakeholders.
The vision of the Insolvency & Bankruptcy Code Was to encourage
entrepreneurship and innovation. It is true that some business ventures will
always fail, but such failures will be handled rapidly and
swiftly.Entrepreneurs and lenders will be able to move on,instead of being
bogged down with decisions taken in the past. The Code empowers the
operational creditors (workmen, suppliers etc.) also to initiate the
insolvency resolution process upon non-payment of dues. In order to develop
the credit market in India, in case of liquidation, financial debts owed to
unsecured creditors have been kept above the Government’s dues in the list
of priorities (waterfall)
Facilitating early resolution and exit is as important as facilitating
investment. The essential idea of the new law is that when a corporate
entity defaults on its debt, control shifts from the shareholders/promoters
to a committee of creditors, who have 180 days (extendable by 90 days in
deserving cases) to evaluate proposals from various players about
resuscitating the company or taking it into liquidation. When decisions are
taken in a time-bound manner, there is a greater chance that the corporate
entity can be saved as a going concern, and the productive resources of the
economy (labour and capital) can be put to the best use. This is in complete
departure from SICA regime where there were delays leading to destruction of
the value of the firm.
However due to some technical difficulties Insolvency & Bankruptcy
Code Could not reach the desired output. In order to improve the efficiency
of the Insolvency & Bankruptcy Code , The Ordinance to amend the Insolvency
and Bankruptcy Code, 2016 (the Code) was signed by the President.
The Ordinance aims at putting in place safeguards to prevent
unscrupulous, undesirable persons from misusing or vitiating the provisions
of the Code. The amendments aim to keep out such persons who have wilfully
defaulted, are associated with non-performing assets, or are habitually
non-compliant and,therefore, are likely to be a risk to successful
resolution of insolvency of a company. In addition to putting in place
restrictions for such persons to participate in the resolution or
liquidation process, the amendment also provides such check by specifying
that the Committee of Creditors ensure the viability and feasibility of the
resolution plan before approving it. The Insolvency and Bankruptcy Board of
India (IBBI) has also been given additional powers.
It may be recalled that the regulations by the IBBI were also amended
recently to ensure that information on the antecedent of the applicant
submitting the resolution plan along with information on the preferential,
undervalued or fraudulent transactions are placed before the Committee of
Creditors in order for it to take an informed decision on the matter.
Along with other steps towards improving compliances, actions against
defaulting companies to prevent misuse of corporate structures for diversion
of funds, reforms in the banking sector, weeding out of unscrupulous
elements from the resolution process is part of ongoing reforms of the
Government. These would help strengthen the formal economy and encourage
honest businesses and budding entrepreneurs to work in a trustworthy,
predictable regulatory environment.
The Ordinance amends sections 2, 5, 25, 30, 35 and 240 of the Code, and
inserts new sections 29A and 235A in the Code.
(i) Clause (e) of section 2 of the Code has been substituted with three
clauses. This would facilitate the commencement of Part III of the Code
relating to individuals and partnership firms in phases.
(ii) Clause (25) and (26) of section 5 of the Code which define
“resolution applicant” and “resolution
applicant” are amended to provide clarity.
(iii) Section 25(2)(h) of the Code is amended to enable the resolution
professional, with the approval of the committee of creditors(CoC), to
specify eligibility conditions while inviting resolution plans from
prospective resolution applicants keeping in view the scale and complexity
of operations of business of the corporate debtor to avoid frivolous
(iv) Section 29A is a new section that makes certain persons ineligible
to be a resolution applicant. Those being made ineligible inter alia include
willful defaulters, those who have their accounts classified as
non-performing assets for one year or more and are unable to settle their
overdue amounts include interest thereon and charges relating to the account
before submission of the resolution plan, those who have executed an
enforceable guarantee in favour of a creditor, in respect of a corporate
debtor undergoing a corporate insolvency resolution process or liquidation
process under the Code and connected persons to the above, such as those who
are promoters or in management of control of the resolution applicant, or
will be promoters or in management of control of corporate debtor during the
implementation of the resolution plan, the holding company, subsidiary
company, associate company or related party of the above referred persons.
(v) It has also been specifically provided that CoC shall reject a
resolution plan, which is submitted before the commencement of the Ordinance
but is yet to be approved, and where the resolution applicant is not
eligible as per the new section 29A. In such cases, on account of the
rejection, where there is no other plan available with the CoC, it may
invite fresh resolution plans.
(vi) Section 30(4) is amended to explicitly obligate the CoC to consider
feasibility and viability of the resolution plan in addition to such
conditions as may be specified by IBBI, before according its approval.
(vii) The sale of property to a person who is ineligible to be a
resolution applicant under section 29A has been barred through the amendment
in section 35(1)(f).
(viii) In order to ensure that the provisions of the Code and the rules
and regulations prescribed thereunder are enforced effectively, the new
section 235A provides for punishment for contravention of the provisions
where no specific penalty or punishment is provided. The punishment is fine
which shall not be less than one lakh rupees but which may extend to two
(ix) Consequential amendments in section 240 of the Code, which provides
for power to make regulations by IBBI, have been made for regulating making
powers under section 25(2)(h) and 30(4).