Indian Law Updates August 2019 Insolvency Practice
Insolvency and Bankruptcy Code(Amendment) Bill, 2019
The Bill provides for the following:
- The Bill provides statutory recognition that maintaining a corporate debtor as a going concern would include ‘resolution plans’ that are in the nature of corporate restructuring schemes including mergers, amalgamation and demergers,where the corporate debtor itself may cease to exist.
- The National Company Law Tribunal, as the Adjudicating Authority shall be obliged to provide reasons in writing why it has not been able to ascertain the existence of a default, if it cannot make such ascertainment within a period of 14 days from the receipt of the application.
- The Bill brings in a total time limit of 330 days for completing the resolution process, including the time taken in any legal proceedings with regard to such resolution process of the corporate debtor. For proceedings pending on the date of the enactment of the Bill, which have already exceeded 330 days, the Bill brings in a transition time limit for completion within 90 days of Bill coming into force. This consequence of not completing the CIRP within the prescribed time period of 330 days presumably means that such a company will be subject to liquidation, which may not be the favourable outcome for the stakeholders. Further, the provision opens itself to legal challenge, especially in circumstances where there are pending legal proceedings, but the expiry of the 330 day period forces the corporate debtor into liquidation.
- At the proceedings of the Committee of Creditors (‘CoC’), where an authorised representative i.e. an agent or trustee for the financial creditors has been appointed, such representative shall cast his vote in accordance with the decision of vote of more than 50% voting share of the financial creditors who have voted, except in cases relating to the withdrawal of insolvency application where the authorised representative must vote according to the
instructions received from each creditor to the extent of his voting share.
- The Bill provides that the COC in approving a resolution plan will be required to consider the proposed manner of distribution and if it recognizes the waterfall provided under the Code at the time of liquidation and the priority of the interests of the secured creditors. The Bill incorporates an earlier position of the CIRP which provides that any dissenting financial creditor must receive in the resolution plan an amount not less than its liquidation value
- The Bill seeks to address operational creditors who have disputed resolution plans on the grounds that the plans the Code are prejudicial to their rights and interests, by allowing for the resolution plan to disregard their claims. Accordingly, the Bill provides that the resolution plan will have to provide that operational creditors will receive not less than the higher of the liquidation value or the amount stated in the resolution plan if the stated waterfall under Section 53 of the Code is adhered to. This provision is retrospective in effect and will apply to all plans which are pending decision of the Adjudicating Authority or have been appealed against or where a legal proceeding has been initiated against the decision of the Adjudicating Authority as on the date of the Bill coming into force.
- The Bill further provides that the distribution plan should be “fair and equitable”. It unfortunately, does not lay down any definition of the principles of determining “fair and equitable” and thus leaves wide scope to judicial authorities to determine whether the plan is fair and equitable.
- Again, in order to expedite the timelines under the Code, the Bill provides that the CoC may decide to liquidate the company prior to the conclusion of the time period for completing the CIRP and even before the preparation of the information memorandum.