[Aayush Mitruka is a lawyer based in Delhi]
In an attempt to debar certain unscrupulous promoters from regaining control over a distressed company, the Insolvency and Bankruptcy Code, 2016 (Code) was amended by way of a presidential ordinance in November 2017 (Ordinance). The new provision introduced rendered certain persons ineligible to be a resolution applicant. Much has been written and spoken about since the promulgation of the Ordinance and we have witnessed an intense debate on various forums about its far-reaching effects and unintended consequences. In order to plug the gaps and bring some more clarity, the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 (Bill) was introduced and has been passed by both houses of the Parliament, which seeks to replace the Ordinance.
Whilst the working of the Code for over a year has shown that there are several wrinkles which need to be ironed out, the Government, in the current Bill, has chosen to focus largely only on the provisions dealing with ineligibilities. It will perhaps be only a matter of time before the Government will have to go back to the Parliament to address other issues. The other changes would be forthcoming once the committee examining the working the Code submits its report. In this blog post, I aim to highlight and discuss the big differences between the Ordinance and the Bill.
The Bill altered the provisions of the newly inserted section 29A prohibiting certain persons from submitting a resolution plan. It identifies ten categories of persons who are disallowed from becoming a resolution applicant and, in all, the provisions seem to be well intended.
The opening sentence of section 29A now appears to be leaner and cleaner. The Bill has introduced the concept of “persons acting jointly or in concert” which essentially takes us to the Securities and Exchange Board of India (SEBI) definition of persons acting in concert. It can be hoped that the word “jointly” could now be differently interpreted in light of the addition of the term “in concert”.
Second, the Ordinance was criticised as being an over-inclusive one. The disqualifications were applicable to all “connected persons”. It is a fairly lengthy term and would virtually include a large number of persons, thereby wiping out a large pool of potential applicants. It has now been clarified that scheduled banks, asset reconstruction companies and alternative investment funds will be kept outside the purview of the expression “related party” included in the definition of connected persons. Surely, this is a welcome change.
Third, the disqualification upon conviction (with an imprisonment term for a period of two years or more) remains intact in the Bill. Bear in mind that the language of clause (d) of section 29A does not suggest that this conviction needs to be necessarily resulting from a financial or an economic crime. Hence, a person who has been for convicted for two years for defamation will also be debarred. In this respect, it was expected that the Government may bring some changes in this clause. However, the Government’s argument in favour of retaining the clause rests on the fact that the Companies Act, 2013 debars any person from becoming a director if she has been convicted for any offence for a period of six months or more.
Fourth, the Bill has clarified that any only those persons who are currently barred by SEBI from accessing the securities market will be prohibited from becoming a resolution applicant as against the earlier position which debarred anybody who, at any point in time, had been debarred by SEBI from accessing the securities market. Earlier the terminology employed in clause (f) in section 29A was “has been prohibited” and now it is replaced by the words “is prohibited”. Considering that there are no fixed ascertainable criteria laid down by the securities regulator while passing such a prohibition order or, worse, that there have been instances in the past of such ex-parte orders being passed, the insertion of such a provision was questionable. However, the present narrowed version seems to be lesser of an evil.
There has been excessive confusion with respect to the provision disqualifying guarantors from participating in the resolution process. Clause (h) of section 29A inspired extensive commentary. The provision in the Bill seems to be more or less the same with some minor cosmetic changes. It will be relevant to note the National Company Law Tribunal, Kolkata (NCLT) had an occasion to interpret this provision and it has ruled that this clause will debar only the guarantors where the guarantee has been invoked. This decision by the NCLT has been previously discussed on this blog. However, this position is far from settled since the decision has been stayed and the matter is now pending before the National Company Law Appellate Tribunal.
Lastly, the list of ineligible persons includes those whose accounts have been classified as non-performing assets under clause (c) of section 29A. The Bill, however, allows such persons who became ineligible by the introduction of the Ordinance to become eligible to submit a resolution plan if they clear all the overdue amounts with interest and other charges relating to their NPA accounts. A corresponding amendment can be seen in section 30(4). It states that those defaulters (under 29A(c)) who had participated in the insolvency proceedings before November 23, 2017 (i.e. the date of promulgation of the Ordinance) can also bid for stressed assets provided they clear their dues within a maximum period of 30 days. Further, a caveat has been placed that the prescribed time period of 180 days (or 270 days, as the case may be) for corporate insolvency resolution cannot in any circumstance be extended.
This appears to be awkward drafting as the following confusion emerges out of it. One may find it difficult to understand as to when this 30-day cure period begins. Secondly, imagine a situation where the resolution process is in its advanced stage and is nearing the 270-day mark. How then is the committee of creditors expected to provide a further time to cure the ineligibility to a disqualified applicant? This may invite unnecessary litigation.
The other provisions in relation to broadening the application of the Code, prohibition on selling of properties to ineligible persons by the liquidator and the prescribed general penalty under the Code remain undisturbed.
During the parliamentary discussions on the Bill, the Minister of Finance candidly admitted that the Code has been a “learning experience” for the government as it was for the first time that such jurisprudence was being introduced in India. Overall, the Bill broadly appears to be clarificatory in nature. Although the intentions are noble, it remains debatable if the imposition of a blanket ban on the existing promoters, without taking into account the causes of failure of an enterprise, is correct. It can only be hoped that the Government will be pro-active in the future too in removing ambiguities as and when they surface.
– Aayush Mitruka