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Cabinet Approves Ordinance to Amend Insolvency & Bankruptcy Code : Civil Services Mentor Magazine: JANUARY - 2018

::Cabinet Approves Ordinance to Amend Insolvency & Bankruptcy Code::

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.

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Gist of the amendments is given below:

(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 applicants.
(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 crore rupees.
(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).