GIST OF RAJYA SABHA TV (RSTV :The Big Picture): The Insolvency and Bankruptcy Code (Amendment) Bill, 2020

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Context

Parliament passed amendments to the insolvency law that will help safeguard successful bidders of insolvent companies from the risk of criminal proceedings for offences committed by previous promoters. The Insolvency and Bankruptcy Code (Amendment) Bill, 2020 was passed by voice vote in Rajya Sabha. It was approved by Lok Sabha on March 6. The Bill replaces an ordinance. Replying to a short debate on the bill, Finance Minister Nirmala Sitharaman said amendments are in sync with the time and also adhere to a Supreme Court order in "letter and spirit". The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process. It aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners. The latest changes pertain to various sections of the IBC as well as the introduction of a new section.

Edited excerpts from the Debate:

What is the Bill all about?

• The Insolvency and Bankruptcy Code (Amendment) Bill, 2020 replaces an ordinance. This is the 4th time that the IBC Code is proposed to be amended.
• The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process.
• It aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners.
• The latest changes pertain to various sections of the IBC as well as the introduction of a new section.
• It will help ring-fence successful bidders of insolvent companies from the risk of criminal proceedings for offences committed by previous promoters.
• The adjudicating authority is National Company Law Tribunal (NCLT) for companies and LLPs and Debt Recovery Tribunal (DRT) for individuals and partnership firms.
• Out of around 43 thousand cases disposed off by National Company Law Tribunal, nearly 15 thousand cases were resolved based on Insolvency and Bankruptcy Code.
• Government is committed to protecting the right and security of every home buyer.
• The Bill also requires a minimum of 10 per cent of allottees or 100 individual allottees in a real estate project to initiate insolvency proceedings for real estate projects.
• As homebuyers are recognised as financial creditors under the IBC, individual homebuyers could initiate insolvency against a real estate company for delays in possession.

What are the important provisions of the Bill?

• Insolvency commencement date
  • The Bill omits provision to clause (12) of section 5 of the Code to clarify that the insolvency commencement date is the date of admission of an application for initiating corporate insolvency resolution process (CIRP).
  • Presently under the Code, the insolvency resolution process commences when the Insolvency Resolution Professional (IRP) is appointed by the adjudicating authority.
• Threshold for initiating resolution process
  • The Bill also specifies the minimum threshold for certain classes of financial creditors for initiating insolvency resolution process.
  • The Code allows the creditors to initiate an insolvency resolution process if the amount of default by the debtor is at least one lakh rupees.
  • The Bill adds an additional requirement for certain classes of financial creditors for filing application.
  • These classes include real estate allottees and security or deposit holders represented by a trustee or agent.
  • The application by these creditors should be filed jointly by at least 100 such creditors or 10% of their total number, whichever is less.
• Corporate debtors entitled to make application
  • The Bill further clarifies that a corporate debtor should not be prevented from filing an application for initiation of corporate insolvency resolution process against other corporate debtors.
  • An explanation to that effect is proposed to be inserted under Section 11 of the Code which stipulates that a corporate debtor undergoing CIRP, or having completed CIRP 12 months preceding the date of making of the application or in respect of whom a liquidation order has been made, etc. shall not be entitled to make an application to initiate CIRP.
• Liabilities for prior offences
  • The Bill provides that a company will not be liable for any offence committed before the commencement of the CIRP and the company will not be prosecuted for such an offence from the date the resolution plan is approved by the NCLT if the resolution plan results in the change in the management or control of the company.
  • Further, the Bill provides immunity to the company from attachment, seizure, retention, or confiscation of their property in relation to such offences.
• Licenses and permits not to be terminated due to insolvency
  • The Bill also amends the Code the effect that a licence, permit, registration, quota, concession, clearances or a similar grant or right will now not be terminated or suspended during the Moratorium period.
  • This provision will be applicable as long as the debtor does not default in the payment of current dues arising for the use or continuation of such licenses or permits.
• Supply of critical goods and services not to be discontinued
  • The Bill mandates that the supplies of goods and services considered critical by the resolution professional cannot be discontinued during the moratorium period.
  • Moratorium period refers to the time period during which NCLT prohibits persons from taking certain actions against the corporate debtor, such as filing or continuation of suits, execution of court orders, or recovery of property.
  • This applies to goods and services that are considered critical to protect and preserve the value of the debtor and manage its operations as a going concern.
  • Suppliers of critical goods and services can stop supplying if:
    • The debtor has not paid dues arising from the supplies during the moratorium period, or
    • In certain other circumstances as may be specified.

What are the major issues?

• In case of defaults by real estate developers, the insolvency resolution application should be filed jointly by at least 100 homebuyers or 10% of their total number.
• The rationale for adding such a threshold only for certain creditors is unclear. Further, a homebuyer wishing to initiate the process may not have details of other allottees.
• The Ordinance empowers the resolution professional to require suppliers to continue providing goods and services during the moratorium period.
• This provision overrides the agency of suppliers to negotiate and decide whether to continue a contractual arrangement. It may also force the supply of goods and services even if the supplier finds it risky or unviable.
• In order to balance the rights of the suppliers, the Bill provides that suppliers have to continue supplying only if their current dues are paid.
• In other countries, additional safeguards are available. These include the right to seek a payment guarantee, and court-granted permission to terminate the contract in cases where the supplier demonstrates that continuation will cause hardship.

Conclusion/ Way forward/ Closing comment

There is need for setting up more tribunals in different parts of the country to handle the greater-than-expected volume of cases. IBC must consider that there are distinct advantages if the existing management is allowed to keep running the company such as knowledge, information and expertise. Proactive training/onboarding of judges, lawyers, and other intermediaries will be necessary for effective implementation of the code. Technological infrastructure needs to be strengthened to avoid any kind of data loss and to maintain confidentiality.