Updated Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 (IBC) is believed to be a historic legislation that has brought about a paradigm shift in the recovery and resolution process.

The Insolvency and Bankruptcy Code, 2016 (IBC) is believed to be a historic legislation that has brought about a paradigm shift in the recovery and resolution process. The IBC was implemented to integrate and modify laws involving restructuring and insolvency resolution for boosting of value of assets, to encourage entrepreneurship, accessibility of credit and balancing the interests of numerous shareholders in a time-restricted manner.
 
The Insolvency and Bankruptcy Code (Amendment) Act, 2019 (Amendment Act) is the latest amendment to the Code which got approval from President on August 5, 2019. The effective date of the Amendment Act has been notified as 16 August 2019. Following are some of the key changes incorporated in the Amendment Act:
 
  1. Definition of Resolution plan will now include provisions for corporate restructuring: The amendment act has inserted an explanation in the definition of resolution plan to clarify that a resolution plan that proposes the insolvency resolution of a corporate debtor may include the provisions for corporate restructuring, including by way of merger, amalgamation and demerger.
 
  1. NCLT will have to record reasons for delay in discarding an application for initiation of CIRP: As per the Code, the NCLT must dispose of an application for initiation of CIRP within a period of 14 days from the receipt of application. However, there have been cases when the NCLT has taken more than 14 days to make a decision on the application. Therefore, to ensure speedy disposal and value maximization of the corporate debtor’s assets, a proviso has been added which requires that NCLT to record its reasons in writing in case an application is not disposed within 14 days.
 
  1. Corporate Insolvency Resolution Process to be concluded within 330 days: Earlier, the IBC demanded completion of CIRP within 180 days including a one-time extension of 90 days. However, many a times the Courts have allowed removal of certain periods, for instance, time consumed in litigation, from the compulsory completion period resulting in a lot of unresolved CIRPs well beyond the time duration allowed in the IBC. The Amendment act makes it compulsory for a CIRP to be completed within 330 days including any extension of time granted and time taken under legal proceedings. It further states that any pending CIRPs that have been going on for over 330 days should be completed within 90 days from the date of commencement of the Amendment Act.
 
  1. Voting by authorised representative representing a class of financial creditors:  To avoid any confusion and facilitate decision making in the Committee of Creditors, especially in cases where financial creditors are a large group, the Amendment Act provides that an authorized representative representing a class of financial creditors shall vote on behalf of all the financial creditors he/she represents in accordance with the decision approved by more than 50% of such financial creditors. This principle however would not be applicable in case of voting for withdrawal of CIRP.
 
  1. Amount payable to functional creditors and disagreeing financial creditors: The Amendment Act provides that payment of debts of operational creditors shall be the higher of
  1. the amount to be paid to these creditors at the time of liquidation of the corporate debtor u/s 53 or
  2. the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance of priority as mentioned u/s 53 (1)
 
Further, the financial creditors who do not vote in favour of the resolution plan will be paid at least the amount payable to them under liquidation waterfall. The said provision will also apply in cases of CIRP of corporate debtor where:
  1. NCLT has not approved or rejected a resolution plan
  2. an appeal is pending at the Supreme Court or at the NCLAT (National Company Law Appellate Tribunal)
  3. a lawsuit has been launched in a court challenging the decision of NCLT in relation to a resolution plan 
  1. Committee of Creditors (COC) to contemplate way of distribution submitted in the resolution plan: Besides the current need of approval of resolution plan after keeping in mind the practicality and acceptability of the resolution plan, the amendment act requires that the CoC consider the manner of distribution proposed in the resolution plan by taking into account the order of priority amongst creditors, as prescribed u/s 53 (1) relating to liquidation waterfall, including the priority and value of security interest of a secured creditor.
 
  1. NCLT approved resolution plan will be binding on the Central Government, State Government or any local authority to whom corporate debtor owes a statutory debt: As per the Code, the approved resolution plan was only binding on the corporate debtor and its employees, creditors, members, guarantors and other stakeholders included in the resolution plan resulting in instances where the Government used to follow up for the balance dues after the said approval of resolution plan. The Amendment Act has now modified Section 31(1) to illuminate that any NCLT approved resolution plan will be binding on the Central Government, State Government and any local authority to whom a corporate debtor owes a debt in respect of payment of dues arising under any law.

  1. Liquidation after setting up the Committee of Creditors (COC): The Amendment Act simplifies by way of an explanation, u/s 33(2) which covers liquidation, that the COC may decide to liquidate the corporate debtor any time after the setting-up of the COC until the confirmation of the resolution plan, including at any time before the development of the information memorandum. This change is pertinent as there have been cases where NCLTs have demanded that a liquidation order may be passed only after failure of the CIRP even though an early liquidation would have resulted in value maximization.