Recent Notifications by Insolvency and Bankruptcy Board of India

Ayushi Gupta | November 2017

The Parliament in order to improve the existing framework for Insolvency and Bankruptcy and to make it adequate, effective and efficacious passed the Insolvency and Bankruptcy Code, 2016 (for short “IBC”) which received the assent of the President on 28.05.2016.

APPLICABILITY OF THE IBC

The provisions of the IBC shall be applicable for insolvency, liquidation, voluntary liquidation or bankruptcy for the following entities:

Any company incorporated under the Companies Act, 2013 or under any previous company law.
Any other company governed by any special Act for the time being in force.
Any Limited Liability Partnership under the Limited Liability Partnership Act, 2008 iv. Other bodies incorporated under any law for the time being in force, as the Central Government may specify by notification. v. Partnership firms and Individual practitioners.

RECENT NOTIFICATIONS AND AMENDMENTS

The Insolvency and Bankruptcy Board of India (for short “IBBI”) has amended the IBBI Regulations, 2016(Insolvency Resolution Process for Corporate Persons) by notification no. IBBI/2017-18/GN/REG018 and IBBI Regulations, 2017(Fast track Insolvency Resolution Process for Corporate Persons) by notification no.IBBI/2017-18/GN/REG017 on 05.10.2017 in application of the power conferred by clause (t) of sub-section (1) of section 196 read with section 240 of the IBC.

The 2016 and the 2017 Regulations are briefly summarized to understand the effect of the notification dated 05.10.2017 on these Regulations as stated above.

THE 2016 REGULATIONS

The 2016 Regulations came into force on 01.12.2016 and the 2016 Regulations shall apply to the Corporate Insolvency Resolution Process (for short “CIRP”) under Chapter II of Part II of the IBC.

What is CIRP

The CIRP insolvency process may be initiated against any renegade debtor by financial creditor, operational creditor and corporate debtor. The Section 12 of IBC states that any CIRP shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate the CIRP with the Adjudicating Authority.
What is a Resolution plan

A Resolution Plan is a proposal agreed by the debtors and creditors of an entity in a collective mechanism to propose a time bound solution to resolve the situation of insolvency.
The Resolution Plan shall

Provide for payment of insolvency resolution process cost.
Provide for the repayment of the debts of operational creditors.
Provide for the management of the affairs of the corporate debtor.
Provide for the implementation and supervision of the resolution plan.
Not contravene with any of the provisions of law for the time it’s enforced

Mandatory Contents of the resolution Plan

Regulation 38 of the 2016 Regulations provide for the Mandatory contents of the resolution plan. The Regulation 38 of2016stipulates that the resolution plan shall identify the sources of funds that will be used for the payment of –

Insolvency resolution process cost and should ensure that it should be paid in priority of other creditor.
Liquidation value due to operational creditors and such payment shall be made in priority to any financial creditor which in any event be made before the end of thirty days after the approval of a resolution plan by the Adjudicating Authority.
With respect to the payment made to the dissenting financial creditors (Creditors who voted against the resolution plan). The regulation stipulates that Resolution plan should ensure that liquidation value due to such creditors shall be provided and such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan.

THE 2017 REGULATIONS

The 2017 Regulations came into force on 14.06.3017 and they regulate the fast track process under Chapter IV of Part II of the IBC which deals with fast track CIRP.

What is fast track CIRP

A fast-track CIRP is the process wherein the CIRP shall be completed within 90 days from the commencement of insolvency date. An application for Fast track CIRP may be made in respect of the following corporate debtors, namely:

A corporate debtor with assets and income below a level as may be notified by the Central Government.
A corporate debtor with such class of creditors or such amount of debt as may be notified by the Central Government.
Any other category of corporate people as may be notified by the Central Government.

Mandatory Contents of the Resolution Plan

Regulation 37 of the 2017 Regulations provides for the Mandatory contents of the Resolution plan. The Regulation 37 of the 2017stipulates that the resolution plan shall identify the source of funds that will be used for the payment of–

Fast track process costs and should ensure that it is paid in priority of other creditor.
Liquidation value due to operational creditors and such payment shall be made in priority to any financial creditor which in any event be made before the end of thirty days after the approval of a resolution plan by the Adjudicating Authority.
With respect to the payment made to the dissenting financial creditors (Creditors who voted against the resolution plan). The regulation stipulates that Resolution plan should ensure that liquidation value due to such creditors be provided and such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan.

AMENDMENT

Vide the IBBI Regulations, 2017 (Insolvency Resolution Process for 18 | Lex WITNESS | November 2017 A Lex Witness Privileged Partners Initiative expert speak Corporate People; Second Amendment) has amended the 2016 Regulations and has inserted sub-regulation (1A) in Regulation 38 after sub-regulations (1) of the 2016 Regulations, and the 2017 Regulations and has inserted sub-regulation (1A) in Regulation 37 after sub-regulations (1) of the 2017 Regulations.

“(1A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.”

EFFECT OF THE AMENDMENT

Before dealing with the effect of the amendment it is important to define who are the stakeholders involved in a resolution plan.

Who are Stakeholders

The Regulation 2(1)(f) of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017 states the term stakeholdersmeans,“the stakeholders entitled to distribution of proceeds under Section 53 of the IBC”.

Section 53 of the IBC provides for order of priority in which the proceeds from sale of liquidation assets shall be distributed amongst:

Secured creditors and workmen dues (up to 24 months).
Other employee’s dues (up to 12 months).
Financial debts of unsecured creditors.
Any amount due to Central Government and State Government and unpaid secured creditors.
Any remaining debt and dues.
Preference Shareholders if any. vii. Equity shareholders or partners.

Prior to the amendment, the IBC, the 2016 Regulations and the 2017 Regulations only gave paramount importance to the interest of the financial and operational creditors which can be seen in the real estate developer Jaypee and Amrapali Insolvency case, as there was no assurance for homebuyers. Homebuyers were left in lurch and would get their money only after the claims of financial creditors are settled.

In Jaypee Infratech Case it was noticed that Section 53 of the IBC gives preference to the interest of secured creditors over the unsecured ones like homebuyers. The cumulative effect of the Section 53 of the IBC was that the stakeholders who were not covered under the category of secured creditors or category ranked below in priority would possibly receive a meagre amount during the liquidation of assets of the company. Hence, the common citizens of the country who have invested their hard earned money have been left remediless and the interest of the big financial institutions have been given primacy over the interest of the public at large.

After the leading real estate developers, Jaypee and Amrapali insolvency case, the IBBI has amended the 2016 Regulations and the 2017 Regulations to mandate that any resolution plan proposed for the company has to categorically show how it will protect the interest of all the stakeholders.

This amendment was introduced to ensure that the interest of not just financial lenders and creditors are safeguarded but, also the interest of all the stakeholder will be protected including homebuyers.

CONCLUSION

This new amendment has fixed the loophole in the IBC and with these changes, even the interest of the stakeholders other than financial and operational creditors is being taken care of.

About Author

Ayushi Gupta

Ayushi Gupta is a graduate from Campus Law Centre, Delhi University. She is an Associate with MCO Legals. She has been involved in Corporate Due Diligence, Transaction Documentations, Third Party Diligence, Compliances and Commercial Arbitrations. She has handled Clients like, Indian Oil Corporation Limited, GAIL, Telecom Communications India Limited, MTNL etc.