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Insolvency and Bankruptcy (Amendment) Ordinance 2018



Introduction

The president of India assented to promulgate the Insolvency and Bankruptcy Code (Amendment Ordinance) 2018 (No. 6 of 2018) dated June 06, 2018. This Amendment will supersede the Insolvency and Bankruptcy (Amendment) Act, 2018 dated January 18, 2018 and will be in furtherance of the Insolvency and Bankruptcy Code (Removal of Difficulties) Order 2017.


The new Amendment comes in light of the need to firstly, balance the interest of stakeholders in the code (especially, homebuyers and micro, small and medium enterprises); and secondly, promoting resolution over liquidation of corporate debtor and thirdly, streamlining provisions relating to the eligibility of resolution applicants.


Home buyers now financial creditors

The Amendment by introducing explanation to Section 5(8) deems home buyers as financial creditors thereby giving them representation in the Committee of Creditors and a say in the decision-making process during the Corporate Insolvency Resolution Process. It also enables them to invoke Section 7 of the Code against defaulting developers.


Leeway for Micro Small and Medium Enterprises

A new Section 240A empowers the Central Government to introduce further exemptions to the Code for MSMEs, if required, in public interest, considering their significance to the economy. In abrupt effect, MSMEs are exempted from application of two disqualifications placed on applicants for application for resolution process: (i) Of associated account being declared as Non-Performing Asset (“NPA”) under clause (c) of Section 29A; and (ii) if he has executed an enforceable guarantee in favor of a creditor in respect of corporate debt against which an application for Insolvency resolution made by such creditor has been admitted under this Code.


Promoting Resolution over Liquidation

In order to promote Corporate Insolvency Resolution Process, voting thresholds have been altered as follows:

Appointment of Interim Resolution Professional

Before Amendment: 75% of voting share of financial creditors

After Amendment: 66% of voting share of financial creditors

Replacement of Resolution Professional

Before Amendment: 75% of voting share of financial creditors

After Amendment: 66% of voting share of financial creditors

Extension of Corporate Insolvency Resolution Process

Before Amendment: 75% of voting share of financial creditors

After Amendment: 66% of voting share of financial creditors

A decision on common matters

Before Amendment: 75% of voting share of financial creditors

After Amendment: 51% of voting share of financial creditors

Approval of resolution plan by Committee of Creditors

Before Amendment: 75% of voting share of financial creditors

After Amendment: 66% of voting share of financial creditors

Initiation of Liquidation[1]

Before Amendment: not prescribed

After Amendment: 66% of voting share of financial creditors


This amendment lays down that, if resolution plan under Section 30(6) has been submitted and the CIRP period has been expired, the Resolution professional should continue to manage the operations of the corporate debtor until an Approval Order is passed by the Adjudicating Authority. It also provides for one-year grace period for the successful resolution applicant to fulfil various statutory obligations required under different laws.


Committee of Creditors (Coc)

The Ordinance further strictens withdrawal of applications, after admission, and permits the same only with the backing of 90% of voting share of the CoC. The Ordinance provides for a mechanism to allow participation of security holders, deposit holders and all other classes of financial creditors that exceed a certain number, in the meetings of the CoC, through authorised representative(s). Prior to this Amendment, all financial creditors of the corporate debtor were required to be constituted within the Committee of Creditors. This Amendment however bars a related party (defined extensively by insertion of Section 24A to the IB Code) to whom a corporate debtor owes financial debt from having any representation, participation or voting rights in the meetings.


Other Notable Changes

The Ordinance amended Section 29A of the Code which now relieves pure play financial entities from disqualifications. Similarly, it has provided a three-year cooling-off period from the date of such acquisition for a resolution applicant holding NPA by virtue of acquiring it in the past under the Code.


In view of the wide array of disqualifications contained in Section 29A, the Amendment now requires the resolution applicant to submit an affidavit certifying its eligibility to take part in the process, placing the primary onus of eligibility on it.


Comments

Prior to this amendment, several loopholes existed in the law. This Amendment is a step ahead in the right direction. Interpretation of the Courts in terms of homebuyers would further clarify their status in the Insolvency Resolution Process.


[1] The amendment requires that continuation of interim resolution professional be subject to written consent from him whereas a written consent is also to be attached to the application to replace the interim resolution professional.

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