Insolvency and Bankruptcy Code 2016 (“Code”) is a law that was implemented through an act of Parliament. The Code provides an insolvency process framework for individuals, companies and partnership firms. It may be noted that, under IBC debtor and creditor both can start ‘recovery’ proceedings against each other. Companies have to complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do not raise objections on the extension.
Since the Insolvency and Bankruptcy Code, 2016 became effective, changes to the IBC have been made on the basis of recommendations made by a 14-member committee headed by the corporate affairs secretary. The amendments also lay down mandatory timelines, processes and procedures for insolvency resolution process.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 was promulgated on June 6, 2018. It amends the Code which stipulates a time bound process for resolving insolvency in companies and among individuals. The Ordinance is expected to further strengthen the Insolvency Resolution Framework in the country and produce better outcomes in terms of resolution as opposed to liquidation, time, the cost incurred and recovery rate.
The ordinance allows a promoter to bid for his enterprise undergoing Corporate Insolvency Resolution Process (CIRP) on a condition that the promoter is not disqualified as a wilful defaulter or due to any other default.
The Code defines a financial creditor as a person to whom financial debt is owed.
Under the IBC, the home buyers were not explicitly covered under the definition of either “operational creditors” or “financial creditors”. Their status has been a subject matter of dispute. The NCLT in the case of Col. Vinod Awasthy v. AMR Infrastructure held that a home buyer cannot be characterised as “operational” creditor” .However, the NCLAT in a subsequent decision in Nikhil Mehta v. AMR Infrastructure has held that they are financial creditors.
Financial Debt has been defined under Section 5(8) of the IBC. It is pertinent to note that Section 5(8)(f) includes within the definition “any amount raised under any other transaction, including, any forward sale or purchase agreement, having the commercial effect of borrowing”.
The Ordinance clarifies that an allottee under a real estate project will be considered a financial creditor. An allottee includes any person to whom a plot, apartment, or building has been allotted, sold, or transferred by a promoter (real estate developer or development authority). The money is paid up front by the home buyers, are delivered to them at a future date. In that sense, the builder-buyer agreements for a real estate project are to that extent one of the ways to raise finance. Hence, these agreements have the effect of borrowing.
The Ordinance would give them due representation in the Committee of Creditors and make them an integral part of the decision making process. It will also enable the home buyers to invoke Section 7 of the Code, however, the mechanism for the same has not been touched upon.
In a land mark case, the Supreme Court in Lokhandwala Kataria Construction Pvt Ltd v. Nisus Finance and Investment Managers LLP (CIVIL APPEAL NO. 9279 OF 2017) had allowed recording of consent terms after the case is admitted under the IBC. and only the Supreme Court could recognize such settlement under Article 142.
Conflicting judgments were being passed by various NCLT Benches recognizing settlement under Rule 11 of NCLT Rules, 2016 that provides for inherent powers. The consistent view of the NCLAT was that Rule 11 NCLT Rules does not apply to the Adjudicating Authority under the Code. This issue now stands resolved with the NCLT and NCLAT being empowered to recognize settlement post admission of application.
The Ordinance appears to have taken note of the Binani-Dalmia insolvency saga, wherein the promoters (along with the initially rejected resolution applicant UltraTech) entered into a settlement with the CoC after the Dalmias were selected as the final resolution applicant whose plan was to be considered by the CoC. They then moved an application for termination of insolvency proceedings.
The Ordinance now provides that such withdrawal will only be permissible before publication of notice inviting Expressions of Interest (EoI).
The provisions of the Limitation Act, 1963 shall apply before the Adjudicating Authority, NCALT, Debt Recovery Tribunal and Debt Recovery Appellate Tribunal. This clarifies a large confusion brought up again and again in various orders including Black Pearl Hotels Pvt. Ld. v. Planet M Retail Limited. A lot of time-barred claims were being filed since the Hon’ble NCLAT had opined that limitation would apply only from 2016 when the Code came into force. The practice was discouraged by the Principal Bench, NCLT but the decision of the NCLAT was regularly cited leading to conflict. The issue is now resolved.
The amended code also provides some reliefs for micro, small and medium enterprises (MSMEs). It does not disqualify promoter of an MSME firm from bidding for his enterprise undergoing corporate insolvency resolution process (CIRP), provided he is not a wilful defaulter and does not attract other disqualifications not related to default.
The Code specifies that all decisions of the committee of creditors shall be taken by a majority of at least 75% of the financial creditors. The Ordinance lowers this threshold to 51%. For certain decisions of the committee, the voting threshold has been reduced from 75% to 66%. These include: (i) appointment and replacement of the resolution professional, (ii) approval of the resolution plan, and (iii) approval of certain actions of the resolution professional during the insolvency resolution process.
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