In order to plug gaps, the Union Cabinet introduced the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (“IBC Amendment Act”). It did not prefer the ordinance route like previous amendments and instead brought in an Act to tackle the problems with the Code. A press release dated July 17, 2019, by the Ministry of Corporate Affairs (“MCA”) clarified that the Act is an effort to remove the complications in the CIRP. The same Act has now been enforced as law. The features of the Act are:
1. The Act speaks volumes about the legislative emphasis on a time-bound conclusion of the CIRP. The Act, with a view to eliminating bottlenecks at the admission stage, proposes to make it legally imperative for the Adjudicating Authority to furnish reasons in writing in case an application for initiation of CIRP is not admitted or rejected within fourteen days. Also, the Act rescinds the ArcelorMittal India Private Limited v. Satish Kumar Gupta and Others’s[i] direction to exclude time consumed in legal skirmishes from the maximum timeline for the consummation of CIRP, which previously was either 180 or 270 days. The Act, with clarity, mentions 330 days from the insolvency commencement date as the maximum duration for the CIRP and if the CIRP fails to find its timely conclusion, the Act mandates compulsory liquidation. The amendment coupled with the Supreme Court’s decision in ArcelorMittal India Private Limited that the decisions of both the CoC and resolution professional ought to be challenged at the stage after the filing of an application under Section 31 of the Code will cut out inordinate delays.[ii]
2. The Act does not want a repeat of the Jaypee Infratech insolvency case and consequently further empowers the authorised representative to participate in the affairs of the CoC. The Act directs that in all matters excluding the withdrawal of CIRP proceedings, the authorised representative ought to cast the vote on behalf of the financial creditors covered under Section 21 (6A) whom he represents and the former’s vote ought to reflect the decision approved by the highest voting share (more than 50 per cent) of the latter on present and voting basis. This will oil the wheels of decision-making in situations where the CoC consists majorly of home buyers, debenture-holders or depositors.
3. With the aforethought of undoing what Standard Chartered Bank v. Satish Kumar Gupta, R.P. Of Essar Steel Ltd. and Others[iii] did, the Act, with specificity, says that the CoC, in its task of approval of the resolution plan, may take into consideration commercial interest in the scheme for distribution of proceeds in the proposed resolution plan, the nature and extent of the security interest of a creditor and the order of priority amongst the financial creditors. The Act intends to tamper with Section 30 (2)(b) of the Code and apply the statutory waterfall ideated in Section 53 to the distribution proposed in the resolution plan too.
4. The Act instructs that financial creditors who are averse to the resolution plan and operational creditors ought to get an equitable and fair sum at the least equivalent to the liquidation value in conformity with Section 53 of the Code or the amount that would have been received if the liquidation value of the corporate debtor had been distributed in consonance with Section 53 of the Code, whichever is higher. The Act, with a view to accommodate Swiss Ribbons v. Union of India’s ‘fair and equitable’ requirement, spells out that the distribution approved by the CoC shall be deemed to be ‘fair and equitable’ to these creditors as long as the statutory provisions are observed. The NCLT’s discretion to investigate the proposed distribution in a resolution plan will be significantly slimmed down.
5. The Act balloons the ‘going concern’ requirement of the Code to encompass corporate reorganisation as a part and parcel of a resolution plan. Section 5 (26) that lays out the definition of resolution plan shall be amended, and it will end up permitting comprehensive schemes for corporate restructuring like a merger, demerger, amalgamation, etc., for better value maximisation.
6. The Act aspires to make the resolution plan on its approval by the Adjudicating Authority legally binding on the creditors including the statutory, government or local authorities that, under the thrall of laws, had pre-CIRP claims against the corporate debtor. This shall put to sleep the pre-CIRP claims litigation that is vehemently pursued by the taxation officials.
7. The Act makes clear that the CoC is at liberty to zero in on the liquidation of the corporate debtor at any time from the constitution of the CoC to the endorsement of the resolution plan but before the preparation of the information memorandum.
The Insolvency and Bankruptcy Code (Amendment) Act, 2019 is the government’s attempt to weed out legal deficiencies and the NCLAT’s decision in Standard Chartered Bank, which is detrimental to the debt industry in totality. Non-preferential treatment of secured and operational creditors will: first, drag down foreign investments that, in turn, will shrink capital flow in the economy[iv]; second, dragoon financial creditors into choosing liquidation in the CIRP for the reason that they shall be able to recover meagre amounts on account of equal treatment of secured, unsecured and operational creditors; third, more loan-loss provisions in a capital-hungry economy.
[Manas Raghuvanshi, is a law graduate from Jindal Global Law School and is an associate in the chambers of Ms Heena Mongia, in Delhi]
[i] Arcelormittal India Private Limited v. Satish Kumar Gupta and Others, 2018 S.C.C. OnLine S.C. 1733.
[ii] L. Viswanathan, Gaurav Gupte & Madhav Kanoria, 2019 IBC Amendment Bill: Swift Action for Course Correction, MONDAQ.COM (Aug. 12, 2019, 10:45 AM), http://www.mondaq.com/india/x/833258/Insolvency+Bankruptcy/2019+IBC+Amendment+Bill+Swift+Action+For+Course+Correction.
[iii] Standard Chartered Bank v. Satish Kumar Gupta, R.P. Of Essar Steel Ltd. and Others, 2019 S.C.C. OnLine N.C.L.A.T. 388.
[iv] Andy Mukherjee, If Not Quashed, Essar Steel Ruling Can Unravel India’s Insolvency Reform, BUSINESS-STANDARD.COM (Aug. 14, 2019, 11:58 AM), https://www.business-standard.com/article/companies/if-not-quashed-essar-steel-ruling-can-unravel-india-s-insolvency-reform-119071700140_1.html.