Government of India issues Insolvency & Bankruptcy Code (Amendment) Ordinance, 2017: Introduces strict restrictions; willful defaulters, persons who are habitually non-compliant or are associated with NPA’s restricted from being resolution applicants.

On November 23, 2017, the Government of India issued the Insolvency & Bankruptcy Code (Amendment) Ordinance, 2017 (“Ordinance”), to amend the Insolvency & Bankruptcy Code, 2016 (“Code”). As per the press release by the Ministry of Corporate Affairs, the Ordinance intends to bar certain persons from participating in the insolvency resolution process including those who have wilfully defaulted, are associated with non-performing assets, or are habitually non-compliant.

The Ordinance brings forth the following key changes to the Code:

(i) Personal guarantors now included within the ambit of the Code: Section 2 of the Code has been amended to include personal guarantors who have executed personal guarantees in favor of any corporate debtor within the ambit of the Code. This would in effect allow debtors to initiate an insolvency process against any person, who has provided a personal guarantee in favor of a creditor. However, it is not clear as to whether such an application can be filed prior to the guarantor defaulting on its obligations under the guarantee or the exact relief that can be sought from the guarantor, given it will not be possible to structure a resolution process against the guarantor.

(ii) Certain persons ineligible to be resolution applicants: The Ordinance bars certain persons from submitting a resolution plan (“Ineligible Persons”). This includes any person or the promoter in management control of any person who:

(a) have been classified as undischarged insolvents;
(b) have been classified willful defaulters as per the Reserve Bank of India regulations;
(c) whose account has been classified as a non-performing asset and one year or more has lapsed from the date of such classification and such person has still failed to make the overdue payments prior to the submission of a resolution plan;
(d) have been convicted for any offence punishable with imprisonment for 2 years or more;
(e) have been disqualified to act as a director under the Companies Act, 2013;
(f) have been prohibited by the Securities & Exchange Board of India from trading in securities or accessing the securities market;
(g) have indulged in a preferential transaction or an undervalued transaction or fraudulent transaction in respect of which an order has been made by the Adjudicating Authority under the Code;
(h) have executed an enforceable guarantee in favor of a creditor, in respect of a corporate debtor undergoing insolvency resolution process under this code;

Further, the prohibitions as set out in (a) to (h) above are also applicable to any “connected person” of the applicant. For the purposes of this clause, a “connected person” has been defined to mean:

i. any person who is a promoter or is in the management or control of the resolution applicant;
ii. any person who shall be the promoter or in the management or control of the business of the corporate debtor during the implementation of the resolution plan;
iii. the holding company, subsidiary company, associate company or related party of a person referred to in clauses (a) and (b).

(h) have been subject to any disability, corresponding to clauses (a) to (i), under any law in a jurisdiction outside India;

(iii) Committee of creditors to approve a resolution plan only after considering feasibility and viability: The Ordinance places a duty on the committee of creditors to consider the feasibility and viability of a resolution plan prior to approval. The committee of creditors (“CoC”) shall not pass a resolution plan in case it is submitted by an Ineligible Person, and in a situation where there are no resolution plans available with it which have been submitted by non Ineligible Persons, it may require the resolution professional to make a fresh call for resolution plans.

(iv) The CoC shall not sell any of the movable or immovable properties or actionable claims of the corporate debtor to an Ineligible Person.

The Ordinance further provides, that any CoC shall reject a resolution plan, which is submitted before the commencement of the Ordinance but is yet to be approved, if the resolution applicant is classified as an Ineligible Person as per the amendments pursuant to the Ordinance.

The Ordinance intends to ensure that promoters or their related parties are unable to take control of a company undergoing insolvency resolution and to further ensure that such promoters are unable to purchase the assets of the corporate debtor at a discount as a result of insolvency. This Ordinance is a further step from the recent amendment to the Code requiring resolution plans to contain additional information and disclosures about resolution applicants. The previous amendment required the CoC to consider such information prior to approving the resolution plan. However, as per this Ordinance, the new Section 30(4) of the Code prohibits the CoC from approving resolution plans presented by Ineligible Persons.

Given the strict nature of the restrictions imposed by the Ordinance, it may give rise to certain specific challenges such as limiting the pool of resolution applicants and including promoters who could be termed as ‘ordinary defaulters’ rather than “habitually non-compliant” or “willful defaulters”. Further, any ongoing unapproved resolution plan by an Ineligible Person will now not be permissible and all such plans will have to be re-submitted to ensure that it is not presented (individually or jointly) by an Ineligible Person. Revisions of such plans may take substantial amount of time and possibly affect all stakeholders of the company. It is likely that the retrospective nature of the Ordinance and its classification of Ineligible Persons will be subject to legal challenge.