IBC (Amendment) Ordinance, 2018 Delivers Positive Modifications
The increase in high profile banking frauds called for the promulgation of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, dated June 6th, 2018. The advent of this amendment Ordinance, 2018 presses upon the Banks and Corporate entities for enhancement in transparency in the CIRP and disclosure of their functioning. The main purpose of the Amendment Act is to prevent the unscrupulous persons from misusing or vitiating the provisions of IBC.
This new Ordinance brings some major changes mainly in Real Estate and Financial sectors and is a sincere attempt to encourage sustainable growth of the credit market in India. Corporates and other stakeholders having Banking interests in India need to evaluate and analyse the new Insolvency laws.
Key Highlights of this Ordinance are:
1. Applicability of Limitation Act, 1963:
Earlier, NCLAT by various orders opined that Limitation Act would apply to IBC, 2016 whereas NCLT discouraged this practice. With the insertion of Section 238A, this Ordinance, 2018 allows the application of provisions of Limitation Act, 1963 proceedings or appeals before NCLAT, Debt Recovery Tribunal and Debt Recovery Appellate Tribunal.
2. Insertion of Sub- clause 5A in Section 5:
This further widens the scope of Corporate Applicant and now includes a Corporate Guarantor within its ambit. Corporate Guarantor means a corporate person who is the surety in a contract of guarantee to a corporate debtor.
3. Recognition of Homebuyers as Financial Creditors: The insertion of Explanation in section 8 (f) which widens the scope of financial debt by including the amount raised from allottee of a Real Estate project and also makes it an amount having the commercial effect of a borrowing. This seems to be a big move by ensuring the frustrated flat-buyers to now pursue the remedy under IBC.
4. Reduction of voting threshold of CoC: In Section 12 of the Code, now RP can extend period of CIRP beyond 180 days, if Committee of creditors passes a resolution by a vote of 66% and not 75%. Again, in section 22, the confirmation of Interim Resolution Professional is now easier as the voting threshold has been reduced to 66% from 75%.
5. Insertion of Section 12A: This section allows the settlement after the commencement of Insolvency. Now there can be withdrawal of applications u/s 7,9 & 10 if there is an approval by 90% voting share of CoC. This nullifies the decision under Lokhandwala Kataria Construction Pvt. Lt. Vs. Nisus Finance and Investment Manager LLP which held that IBC didn’t have power to recognise settlement after admission of insolvency.
6. Scope of Moratorium reduced: In Section 14, there is an insertion of 3(b) which says that Moratorium will not include surety in a contract if guarantee to a corporate debtor.
7. Amendment in Section 434 of Companies Act, 2013: With the introduction of proviso to this section, it now allows the Petitioner, in case where a Winding Up Petition is pending in HC to apply for transfer of proceedings to Adjudicating Authority and such petition shall be treat as one under IBC.
8. Insertion of sub-clause (4) in Section 3: This introduced that the Resolution Plan shall be approved with all permissions within one year of approval of RP by Committee of Creditors.
9. Amendment in Section 30 (2) (f): An Explanation is added which says that if the Resolution Plan requires an Approval of Shareholders then the same shall be deemed to be given.
10. Treatment of MSMEs: Now IBC, will not disqualify the promoter to bid for his enterprise undergoing CIRP provided he is not a wilful defaulter does not attract other disqualifications not related to be default.
Now, that the Ordinance has been promulgated for easement and speedy disposal of Bankruptcy cases, key factors must be considered:
1. New hope for other customers: With the recognition of homebuyers as financial creditors, a similar protection is looked forward to by other customers facing industries where the retail consumes pay large advances to purchase goods/ services.
2. Consequences of rendering wilful defaulters ineligible: Though the new wide scope of disqualification will restrict the number of participants in the CIRP but it will be enthralling to see how promoters, who have defaulted because of factors beyond their control like poor business performance and are now ineligible to submit resolution plans, choose to react to this Ordinance.
3. Scope of Potential Suitors narrowed down: The new disqualification factors by amended Section 29A narrows down the scope of potential suitors who will be able to submit a bid for stressed assets by reducing the strength.
The IBC Amendment Ordinance, 2018, clearly brings about affirmative changes like a relief to homebuyers and reduction of voting threshold of CoC from 75% to 66 % etc. which aim to further improve the procedure of CIRP. This Amendment finely tunes and streamlines the CIRP and settles many contentions earlier rose. This also attempts to remove the backdoor entry of corrupt promoters. However, the actual impact of this ordinance as to whether it serves the purpose of adding efficacy in insolvency laws or not will be seen over a period of time as the same depends on how the various stake holders implement it.