Insolvency and Bankruptcy Code (Amendment) Act, 2019 – An Overview By: Abhishek Gupta

The Insolvency and Bankruptcy Code, 2016 (“The Code”, for short) has proved to be a game-changer in the resolution of debt-ridden companies and realization of outstanding dues by the creditors.

To quote Late Shri Arun Jaitley Sir from his address of January’ 2019 on the completion of two years of the Code, “The early harvest through the IBC process has been extremely satisfactory. It has changed the debtor-creditor relationship. The creditor no longer chases the debtor. In fact, it is otherwise. Upon constitution of the NCLT and the implementation of IBC its functionality had revealed the need for improvements in the law. Two legislative intervention since then have taken place.”

The third legislative intervention, by way of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, is a befitting tribute to the legacy and sagacity of the erstwhile Finance Minister, who was instrumental in reforming the bankruptcy structure of India.

The 2019 IBC Amendment Bill was introduced in the Upper House of the Parliament on 24^th July, 2019 and passed by it on 29^th July, 2019. The Bill passed the hurdle of the Lower House on 1^st August, 2019, and thereafter, received the assent of the President on 5^th August, 2019. The Amending Statute was published in the Official Gazette on 6^th August, 2019, and came into force in toto on 16^th August, 2019. This Article attempts to underscore and unfold the changes introduced in the Code by the 2019 Amendment Act.

Key Highlights of the 2019 Amendment Act:

The Act inter alia aims to provide a timebound completion of the insolvency process, confers preference upon secured financial creditors over operational creditors in the matter of distribution of assets upon resolution of a corporate debtor, and lays down the manner of voting by an authorised representative on behalf of the class of financial creditors.

1. Section 5(26) – Resolution may include merger/demerger

Section 2 of the 2019 Amending Act inserts an explanation to clause 26 of the existing Section 5 of the principal Code, viz. the definition of ‘resolution plan’, whereby it clarifies that a resolution plan may include provisions for the restructuring of the corporate debtor, inclusive of a merger, amalgamation and demerger of the corporate debtor. This is largely seen as a clarificatory amendment, since the scope of a ‘resolution plan’ was never confined to only a select number of proposed solutions of commercial insolvency.

2. Section 7(4) – Accountability of the Adjudicating Authority in timely determination of the existence of default

Section 7(4) of the Code ‘directs’ that in case of an application by a financial creditor, the AA shall ascertain the existence of default within 14 days of the receipt of application. Further, sub-section (5) makes it incumbent on the AA to pass an order of admission/rejection of the application.

The Supreme Court in the case of J.K. Jute Mills Co. Ltd. v/s Surendra Trading Co. had endorsed the view of the National Company Law Appellate Tribunal (NCLAT) that this time limit of 14-days is directory in nature rather than mandatory, and that  AA possesses inherent powers to relax the 14-day timeline in the interests of fairness and justice.

The amendment, by way of insertion of proviso to Section 7(4), requires that if the AA has not ascertained the existence of default and passed an order under Section 7(5) within such time, it shall record its reasons in writing for the same. This amendment, sans diluting the effect of the Supreme Court ruling in J.K. Jute Mills (supra), seeks to ensure that the 14 day period is only extended in exceptional circumstances and not as a matter of routine.

3. Section 12 – Corporate insolvency resolution process to be mandatorily completed within 330 days

In what can be touted as the most far-reaching amendment to the IBC’ 2016, the newly inserted provisos to Section 12(3) of the Code provide that the CIRP must mandatorily be completed within a period of 330 days from the date of commencement of the insolvency process (inclusive of all or any extensions granted as well as the time taken in the related legal proceedings). Further, for a pending CIRP which has not been completed within the 330-day time period, the Amendment provides for an additional leeway of 90 days from the date of commencement of the 2019 Amendment Act.

The use of the words ‘mandatory’ and ‘shall be completed’ categorically conveys the intent of the legislature to ensure the timely completion of the CIRP in the specified time period without exception.

Prior to the amendment, the maximum period allowable for CIRP was 180 days, extendable by a maximum period of 90 days. However, many CIRPs were breaching this overall 270-day limit owing to the protracted litigation, successive appeals, interplay between several stakeholders in the process, and many a times, sporadic intervention by the creditors. With the advent of an additional time period of 60-days, the Government has taken cognisance of the multifactorial delay in completion of the delay, but conspicuously, has abstained from enacting substantial measures to arrest this delay. It remains to be seen how the new timeline is greeted by the NCLAT-NCLT, especially in context of the ‘elephant in the room’, viz. the resolution of Infrastructure Leasing & Financing Services (IL&FS) and its 348 group companies which is far from completion and nearing the 330-day watershed.

4. Section 25A(3A) – Representative voting by authorized representative of financial creditors

Section 25A(3) of the Code provides that an authorized representative (AR) representing several financial creditors shall cast his vote in respect of each financial creditor in accordance with instructions received from each of them, and in the absence of such prior instructions, the AR shall abstain from voting on behalf of such creditor.

The amendment adds sub-section (3A) to section 25, which prescribes that notwithstanding anything to the contrary contained in sub-section (3), an AR (a trustee, agent, guardian, executor or administrator) representing a class of the financial creditors (such as homebuyers, beneficiaries of securities or deposits held with a trustee, etc.) under section 21(6A), shall cast his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than 50% of the voting share of the financial creditors he represents, who have cast their vote.

Further, the proviso to Section 25A(3A) clarifies that the amended voting process shall not be applicable for taking a decision on the withdrawal of a Resolution Application under Section 12A, and the voting process in such cases shall be governed by Section 25A(3) only.

5. Section 30 – Distribution of funds inter se the operational creditors and secured creditors under resolution plan

The overhaul of Section 30 of the Code is the most significant amendment brought out by the Government, that seeks to implement the vertical approach in CIRP, in tandem with Section 53. The amendment was necessitated in view of the recent NCLAT ruling dated 4^th July, 2019 in Essar Steel India Ltd. case which granted operational creditors equal status as the financial creditors in the distribution of the bid amount of resolution plan. It was observed by NCLAT that the ‘waterfall mechanism’ under Section 53 of IBC is only applicable to distribution of proceeds from liquidation and not to the resolution bids. However, on 22^nd July 2019, the Supreme Court directed status quo apropos the implementation of the NCLAT Order. The appeals are pending consideration before the Supreme Court.

Prior to the 2019 Amendment, the Code provided that payment to operational creditors under a resolution plan must not be less than the amount that the operational creditors would have received in a liquidation scenario. However, with the NCLAT ruling undermining the original intent of the Code, the 2019 Amendment has clarified that distribution of funds inter se the creditors is to be respected even in the insolvency proceedings and that principle enshrined under Section 53 of the Code ought to be observed even in CIRP.

Section 30 of the Code has been revamped as under:-

1. Section 30(2)(b) of the principal Code has been substituted to provide the payment to operational creditors must not be less than the higher of:

1. the amount that would have been paid to such operational creditors in the event of a liquidation of the corporate debtor under section 53 of the Code; or
2. the amount that would have been paid to such operational creditors if the amount distributed under the resolution plan was distributed in accordance with the order of priority specified under section 53(1) of the Code.

2. It is further specified that payments to financial creditors who do not vote in favour of a resolution plan will be determined in accordance with regulations framed by the Insolvency and Bankruptcy Board of India; but will not be less than the amount that would have been paid to such creditors in the event of liquidation of the corporate debtor.

Consequentially, clause (w) under Section 240(2) has been amended to substitute the words “repayment of debts of operational creditors” with the words “payment of debts”.

3. As a direct offshoot of Essar (supra), the first explanation to Section 30(2)(b) of the Code clarifies that the distribution of funds in accordance with the instant provision shall be deemed to be fair and equitable to such creditors, thereby reducing the scope of judicial intervention and concomitant litigation at this stage.
4. The second explanation to Section 30(2)(b) provides for retrospective application of the aforesaid scheme of distribution to CIRP proceedings of a corporate debtor, where:-

1. the resolution plan has not been approved/rejected by the NCLT; or
2. an appeal has been preferred before the NCLAT/Supreme Court under Section 61 or 62 respectively, or such appeal is not time-barred under any provision of law; or
3. where a legal proceeding has been initiated in any court against the decision of the AA in respect of a resolution plan.

5. The committee of creditors, while approving the resolution plan under Section 30(4), has been instructed to consider the proposed manner of distribution, that may take into account the order of priority amongst creditors as laid down in section 53(1), including the priority and value of the security interest of a secured creditor. Hence, the priority waterfall mechanism has been incorporated as an explicit criteria for a proposed distribution under CIRP. Further, it specifies that a secured creditor is to be recognized and treated in accordance with the security it holds, and accordingly, the resolution plan ought to consider even the inter-se rights of secured creditors. It can always be debated as to why the letter and spirit of Section 52 was not employed and followed for the treatment of secured creditors under CIRP.

6. Section 31 – Approved resolution plan binding on all Stakeholders

According to the unamended section 31(1), a resolution plan approved by the adjudicating authority was binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. Now, the amendment, sans altering the original language and purport of Section 31, adds “the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed” in the list of stakeholders bound by the plan.

It is apposite to mention that the term “creditors” appearing in Section 31(1) was never intended to be exhaustive and included Government/Government authorities within its purview. That said, the amendment settles the dust once and for all, and confers clarity that once a resolution plan is approved, it is binding on the government or any local authority as well, thereby precluding raising of claims/demands post-approval of a resolution plan.

7. Section 33(2) – Liquidation before confirmation of resolution plan

Section 33(2) says where the resolution professional, at any time during the CIRP but before confirmation of the resolution plan, intimates the AA of the decision of the CoC, approved by a majority of 66% of the voting share, to liquidate the corporate debtor, the AA shall pass the liquidation order.

The newly inserted explanation to Section 33(2) clarifies that the CoC may take the decision to liquidate the corporate debtor at any time after its constitution under Section 21(1) and before the confirmation of the resolution plan, including any time before the preparation of information memorandum as per Section 29 of the Code.

Conclusion:

The Insolvency and Bankruptcy Code (Amendment) Act, 2019 iterates the intrinsic intent of the Code, viz. expeditious resurrection of a corporate debtor through timebound initiation and completion of the resolution process. Of the many reforms the Amendment introduces, it notably reinforces the primacy of the CoC as the ultimate decision maker, whether w.r.t. distribution of funds inter se the creditors or the decision to keep the entity alive or liquidate it during CIRP. It was only a matter of time that the hierarchical classification of the creditors under Section 53 of the Code found its rightful place under Section 30 as a yardstick to decide the distributions under the resolution plan.

It will be interesting to see if NCLAT-NCLT resorts to its inherent powers under Rule 11 of NCLT Rules, 2016 and NCLAT Rules, 2016 to escape the rigours of the amended Code.