Lok Sabha, on Thursday, passed the Insolvency and Bankruptcy Code (Amendment) Act, 2019. It was passed in the Rajya Sabha on the 29th of July. This is the third time the government has brought in amendments to the IBC since its enactment in 2016.
The government came out to support the financial creditors and spelled out concerns over the extensive litigation and undue delays in insolvency proceedings.
Finance Minister, Nirmala Sitharaman said that the amendments have been made to ensure timely admission of insolvency cases and completion of the corporate insolvency resolution process within the newly set deadline of 330 days (as opposed to 270 days earlier). The deadline includes the litigation and the judicial process stage. On the enactment of the Bill, if any case is pending for over 330 days, it must be resolved within the next 90 days. The resolution plan under the corporate insolvency resolution process will also be binding on the Centre, State and local authorities.
Sitharaman said that the proposed amendments also respond to issues pertaining to financial creditors due to the recent ruling by NCLAT with respect to financial and operational creditors. It clarifies the matter regarding the preference of secured financial creditors over operational creditors in the matter of distribution of assets of the debtor. The clarification was necessary in view of the recent ruling of the NCLAT in Essar Steel case.
Resolution Plan: The Code provides that the resolution plan must ensure that the operational creditors receive an amount which should not be lesser than the amount they would receive in case of liquidation. The Bill amends this to provide that the amounts to be paid to the operational creditor should be the higher of: (i) amounts receivable under liquidation, and (ii) the amount receivable under a resolution plan, if such amounts were distributed under the same order of priority (as for liquidation).
Further, the Bill states that this provision would also apply to insolvency processes: (i) that have not been approved or rejected by the National Company Law Tribunal (NCLT), (ii) that have been appealed to the National Company Appellate Tribunal or Supreme Court, and (iii) where legal proceedings have been initiated in any court against the decision of the NCLT.
Initiation of the resolution process: As per the Code, the NCLT must determine the existence of default within 14 days of receiving a resolution application. Based on its finding, NCLT may accept or reject the application. The Bill states that in case the NCLT does not find the existence of default and has not passed an order within 14 days, it must record its reasons in writing.
Focusing on revival: Nirmala Sitharaman also made it clear that the IBC was not looking to force companies into liquidation, but focused on their revival and continuing as going concerns.
“Not allowing companies to die is the spirit behind IBC. If there is any prospect of company getting revived, the solution is not to go to liquidation, but ensure it is going concern,” she said.
Representative of financial creditors: The Code specifies that, in certain cases, such as when the debt is owed to a class of creditors beyond a specified number, the financial creditors will be represented on the Committee of Creditors (CoC) by an authorised representative. These representatives will vote on behalf of the financial creditors as per instructions received from them. The Bill states that such representative will vote on the basis of the decision taken by a majority of the voting share of the creditors that they represent.
Nirmala Sitharaman said that there are now 335 cases whose resolutions are pending for over 330 days. There are 445 cases pending which are pending in excess of 270 days but less than 330 days. As many as 221 cases are pending resolution between 180-270 days. As many as 475 cases have been sent for liquidation. Their aggregate liquidation value was ₹24,417 crore against claim of ₹3,46,655 crore.