Impact of Recent Amendments to the Insolvency and Bankruptcy Code

[Ashwin Gowda and Supreme Waskar are corporate lawyers in Mumbai. The views hereunder are personal]

With the Insolvency and Bankruptcy Code (Amendment) Act, 2019 being notified on 6 August 2019, it would be important to discuss the changes introduced through the Amendment as it intends to address the critical issues in the corporate insolvency resolution framework, including one pursuant to the National Company Law Appellate Tribunal’s (“NCLAT”) order dated 4 July 2019 in the Essar Steel case, while simultaneously maximizing value from the Corporate Insolvency Resolution Process (CIRP) as provided under the Insolvency and Bankruptcy Code, 2016.

In this post, we have encapsulated the important changes that have been proposed under the Amendment, which are as follows,

Clarification with respect to the scope of the term ‘resolution plan’

The Amendment clarifies that the term ‘resolution plan’ should include provisions for the restructuring of the corporate debtor, including ‘by way of merger, amalgamation and demerger’. It is pertinent to note that, even prior to this Amendment, a resolution applicant has successfully merged with corporate debtor through their resolution plan, i.e. Synergies Castings Limited (resolution applicant) successfully merged with Synergies Dooray Automotive Limited (corporate debtor) through its resolution plan under the Code and payments were made in staggered manner over time.

Adjudicating Authority (“AA”) to provide reasons for delay in adjudication of applications filed by financial creditors

In relation to an application under section 7 of the Code, previously the statutory timeline of 14 days imposed on the AA for ascertaining the existence of default and passing an order (i.e. financial debt or operational debt) was directory and not mandatory in nature. However, according to the Amendment, if the AA fails to ascertain the existence of default and pass an order within 14 days of receipt of, then it shall record its reasons in writing for the same. This is a welcome step as to avoid delays in the admission process.

Extension of the CIRP timeline

Currently, the maximum time period permitted for concluding the CIRP is 270 days (including after obtaining an extension of 90 days). However, according to the Amendment, the said time limit has been extended to 330 days, which would include the extension of 90 days (if granted) and also the time taken in legal proceedings in relation to such resolution process of the corporate debtor. This amendment would directly nullify the ruling laid down by the National Company Law Appellate Tribunal (NCLAT) through its order dated 8 May 2018 in Quinn Logistics India Private Limited vs. Mack Soft Tech Private Limited, wherein the NCLAT had laid down the exceptional grounds for extending the CIRP timeline beyond 270 days, including if the CIRP is stayed by the AA, NCLAT or the Supreme Court. Under the present Amendment, it has been clearly provided that even period taken for legal proceedings in relation to the CIRP of a corporate debtor shall be taken into consideration while calculating the deadline of 330th day. This could easily hamper in achieving the object of successful resolutions of corporate debtors, as frivolous litigations can be easily brought up by any stakeholder of the corporate debtor and / or unsuccessful resolution applicants to derail the resolution process.

Clarification with respect to distribution of proceeds from the resolution plan to financial creditors (who have voted against the resolution plan) and operational creditors

The Amendment clarifies that financial creditors (who have voted against the resolution plan) and operational creditors shall receive at least the amount that would have been received by them if the amount to be distributed under the resolution plan had been distributed in accordance with the ‘distribution waterfall’ laid down under the Code or the amount that would have been received if the liquidation value of the corporate debtor had been distributed in accordance with the ‘distribution waterfall’ laid down under, whichever is higher. Further, it has also been proposed that this specific amendment should be retrospective in effect, wherein the same shall be applicable to cases where the resolution plan has not attained finality or has been appealed against. The Union Minister for Finance and Corporate Affairs, Mrs. Nirmala Sitharaman, has confirmed that the said Amendment was required in order to reverse the Essar Steel order. As we know, under the Essar Steel order, the NCLAT modified the resolution plan in order to put the operational creditors at par with the secured / unsecured financial creditors with respect to the distribution of proceeds arising out of the resolution plan.

Binding effect of resolution plan on government authorities

Hitherto, the Code has been silent on whether a resolution plan (that has been approved by the AA) would be binding on government authorities. However, under the Amendment, it has now been proposed that the said resolution plan should also be made binding on the Central Government, any State Government or any local authority to whom debts are owed by the corporate debtor.

Committee of Creditors can initiate liquidation proceedings against the corporate debtor even before preparation of the information memorandum

The Amendment, by way of a clarification, proposes that the Committee of Creditors should have the right to initiate liquidation proceeding against the corporate debtor before the confirmation of the resolution which would include before the preparation of the Information Memorandum as well. In our view, this clarification would help the Committee of Creditors take a quicker decision to liquidate the corporate debtor, in case it practically requires to do so.

 Ashwin Gowda & Supreme Waskar

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