The Insolvency & Bankruptcy Code, 2016 (the “Code”) consolidated the archaic insolvency laws, provided a consolidated legislation and revolutionised the insolvency regime in India. Undoubtedly, the Code has had a significant impact on the way corporate India functions. It has been almost two years since the Code came into effect and in the year 2017 some significant amendments have been made to the Code based on inputs received from various market participants.
The President of India while exercising his power under Article 123 of the Constitution of India on November 23, 2017 promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (“Ordinance”) which amended the existing Code. The purpose of this Ordinance was to strengthen the Corporate Insolvency Resolution Process (“CIRP”).
The Insolvency and Bankruptcy Code (Amendment) Bill, 2017 was introduced to replace the Ordinance. The bill was passed by both houses of the Parliament and received President’s assent on January 18, 2018 to become the Insolvency and Bankruptcy (Amendment) Act, 2018 (the “Amendment Act”).
The Amendment Act has a retrospective effect as it is deemed to be in force from November 23, 2017. This also means that it nullifies the Ordinance which came into force on same day and any action which was governed by the Ordinance will be governed by the Code as amended by the Amendment Act.
Analysis of the key changes made by the Amendment Act
Application of the Code
The Amendment Act by amending Section 2 of the Code, extends the application of the Code to personal guarantors of the corporate debtor and proprietorship firms who were earlier immune from any liability under the Code. This has brought clarity on the initiation of CIRP against the personal guarantors of the corporate debtor as prior to the Amendment Act, the Allahabad High Court in case of Sanjeev Shriya v. State Bank of India[See Endnote. 1], observed that personal guarantors of the corporate debtors were not expressly covered under the CIRP contemplated in the Code. The Amendment Act now brings the much-needed clarity in relation to the applicability of the Code to personal guarantors, who now fall within its ambit.
Further, proprietorship model of business is most common amongst small and medium enterprises in India and there was no special legislation governing the insolvency of a proprietorship concern. Hence, inclusion of proprietorship firms under the insolvency regime is a welcome move and will reduce the scope of default by such firms.
Invitation to resolution applicants
The term resolution applicant was previously defined in the Code as “any person who submits a resolution plan to the resolution professional”. This definition was a cause of debate and confusion as two different schools of thought existed regarding the interpretation of the definition.
On one hand, it was argued that the definition of resolution applicant should be read in consonance with Section 25(2)(h) of the Code which requires the resolution professional to invite prospective lenders, investors, and any other person to put forward a resolution plan. Therefore, only a person who is invited by the resolution professional could submit his resolution plan and was considered as a resolution applicant. On the other hand, the line of argument was that the definition of resolution applicant in the Code does not make any reference to Section 25 of the Code and hence, the resolution plan can be submitted by any person irrespective of whether he has been invited to do so by the resolution professional. The resolution professional upon receiving any resolution plan from any such uninvited resolution applicant was also bound to review and examine the resolution plan.
This debate has been put to rest by the Amendment Act by amending the definition of resolution applicant. Now, a resolution applicant means “a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25”. Therefore, the resolution professional is now obligated to review and examine the resolution plan submitted by only such persons who have been expressly invited by the resolution professional to submit a resolution plan.
Further, the Amendment Act also provides that the resolution plan can now be submitted by any person either singly or jointly with any other person. This will facilitate the CIRP of large distressed assets.
Qualifying criteria for resolution applicants
The Amendment Act amends the liberty provided to the resolution professional laid down in Section 25 of the Code. Previously, the resolution professional had the liberty to invite any prospective lender, investor, and any other person to put forward a resolution plan. However, the Amendment Act provides that the resolution professional must now determine eligibility criteria, with the approval of the committee of creditors, for persons who can be invited by the resolution professional for presenting the resolution plan. While determining the eligibility criteria, the resolution professional is now obligated to give due regard to the complexity and scale of operations of the business of the corporate debtor.
This amendment would ensure that only persons with sufficient and relevant financial, legal and technical competency submit the resolution plan.
Disqualification from submitting resolution plan
Prior to the Amendment Act, it was becoming increasingly common amongst the unscrupulous promoters of corporate debtors to themselves submit a resolution plan in a CIRP for their own distressed company and thereby be the resolution applicant.
In order to curb such practices, the Amendment Act has now added a new provision in form of Section 29A in the Code. This amendment is made in line with the Ordinance. However, unlike the ordinance, the Amendment Act uses the word ‘persons acting jointly or in concert’ which implies that apart from the ineligible person any other person acting together with such person for a common objective is also ineligible to be a resolution applicant.
Section 29A of the Code now makes certain persons ineligible to submit a resolution plan, if such person, or any person acting jointly with such person, is: (i) an undischarged insolvent; (ii) a wilful defaulter; (iii) a person who has an account or an account of a corporate debtor under the management or control of such person, classified as non-performing asset and a period of one year has lapsed since such classification; (iv) a person convicted of any offence punishable with imprisonment for two years or more; (v) a person disqualified to act as a director under the Companies Act, 2013; (vi) a person prohibited by the Securities and Exchange Board of India from trading in securities or accessing the capital markets; (vii) a person who has been a promoter or in the management or control of a corporate debtor in which a preferential or undervalued or extortionate credit or fraudulent transaction has taken place in respect of which an order has been made by the National Company Law Tribunal (“NCLT”); (viii) a person who has executed an enforceable guarantee in favor of a creditor, in respect of a corporate debtor undergoing CIRP; ix) a person who has been subject to any disability, corresponding to clauses (i) to (viii) above, under any law in a jurisdiction outside India.
The Amendment Act, prohibits a person who has a ‘connected person’ suffering from any of the disqualifying factors mentioned in (i) to (ix) above also from presenting a resolution plan. The term ‘connected person’ means any person (i) who is the promoter or in the management or control of the resolution applicant; or (ii) who shall be the promoter or in management or control of the business of the corporate debtor undergoing the CIRP; or (iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii) above but not including a scheduled bank, an asset reconstruction company and an alternative investment fund.
Therefore, contrary to the popular perception, not all ‘connected persons’ are disqualified from submitting a resolution plan but only those specific ‘connected persons’ suffering from the disqualifying factors mentioned in (i) to (ix) above are disqualified from submitting a resolution plan.
As mentioned above, a person who has executed an enforceable guarantee in favor of a creditor, in respect of a corporate debtor undergoing CIRP is also not eligible to submit a resolution plan. In this regard, there was a lot of confusion whether any guarantor will be disqualified from submitting a resolution plan or only defaulting guarantors will be disqualified. On December 18, 2017, the NCLT, Kolkata Bench in RBL Bank Limited v. MBL Infrastructure Limited[See Endnote. 2], dealt with this issue and observed that only such class of guarantors who on the account of their antecedent, may adversely impact the credibility of the CIRP under the Code will be disqualified from submitting a resolution plan. The NCLT further explained that the antecedent of the guarantor can only be questioned if the guarantor has defaulted and not honored his lawful contractual obligation or has conspired with the promoter in deliberately causing insolvency of the corporate. Hence, the rationale behind disqualifying guarantors from submitting resolution plan is not to disqualify promoters as a class of resolution applicant but to exclude such class of persons who may adversely affect the reliability of the CIRP under the Code. Therefore, a guarantor cannot be disqualified only on the ground of existence of a binding contract of guarantee but shall stand disqualified only upon default. However, an appeal has been preferred against this order and the matter still lies undecided before the National Company Law Appellate Tribunal.
Therefore, the abovementioned disqualification factors narrow down the scope of potential suitors who will be able to submit a bid for stressed assets and the number may reduce significantly. But it is a welcome change considering it disqualifies persons having poor antecedents from taking part in the CIRP process and thereby improving its credibility. It would be mandatory for the resolution applicants to disclose all details about themselves and the persons acting in concert with them for submission of the resolution plans. This would also lead to more transparency.
Submission of resolution plan
The Amendment Act also amends Section 30(4) of the Code and provides that committee of creditors must approve the resolution plan by a vote of not less than seventy-five per cent of voting shares of financial creditors. The approval of the resolution plan must be given only after considering the viability and feasibility of such a resolution plan. The committee of creditors cannot approve any resolution plan submitted before November 23, 2017 by persons disqualified under factors provided under Section 29A of the Act and if no other resolution plan is available with the creditors committee then it should invite fresh resolution plans. This may adversely affect the CIRP which are in penultimate stage of the completion and give rise to unnecessary litigation. However, it is important that even at the cost of quick closure of CIRP, the transparency and credibility should be improved otherwise the corporate debtor undergoing CIRP will move from one insolvency phase to another and only persons with doubtful antecedents will benefit. Further, if a resolution plan is submitted by a person whose account has been classified as non-performing asset for a period of more than one year, then a cure period of 30 days from the date of submission of the resolution plan is available to such a person to make payment of the overdue amount along with the interest and charges thereon.
Prohibition on sale of distressed assets to disqualified persons
The amendment to Section 35 of the Code ensures that properties or actionable claims of a corporate debtor undergoing CIRP are sold to a person who is eligible to be a resolution applicant and bars the sale of any immovable or movable property or actionable claim of the corporate debtor undergoing CIRP by the liquidator to a person not eligible to be resolution applicant. This amendment safeguards that the liquidator also ensures that the buyer of a distressed asset is eligible and not disqualified under any of the criteria laid down in Section 29A.
Punishment where no specific punishment or penalty is provided
The Amendment Act introduces a new provision in form of Section 235A. This section prescribes a fine of not less than one lakh rupees which can be extended up to two crore rupees if any person contravenes any provision of the Code or rules and regulations made under it if no penalty is prescribed for such contravention specifically.
The objective of the Amendment Act primarily is to prevent unscrupulous persons from misusing or vitiating the provisions of the Code. The Amendment Act has been designed to fine tune and streamline the CIRP and deal with many of the contentious issues raised under it. It ensures transparency in the CIRP by imposing strict eligibility criteria for being a resolution applicant and presenting a resolution plan and by introducing multiple layers of safeguard. It also attempts to remove the backdoor entry of unscrupulous promoters. Such wide scope of disqualifications will restrict the number of participants in the CIRP but improve its credibility. However, it will be intriguing to see how promoters, who have defaulted because of factors beyond their control such as genuine poor business performance and now are ineligible to submit resolution plans, choose to react to the Amendment Act. The consequences of rendering certain class of people ineligible to participate in CIRP may have unintended results.
[The author is an Associate in Corporate law Practice, Lakshmikumaran & Sridharan, Delhi]