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The Insolvency and Bankruptcy Code, 2016 ("Bankruptcy Code") has proved to be a game-changer for corporate India and has witnessed several key amendments sparked by inputs received from market ...
The Insolvency and Bankruptcy Code, 2016
("Bankruptcy Code") has proved to be a
game-changer for corporate India and has witnessed several key
amendments sparked by inputs received from market participants.
Being a new enactment, loopholes are bound to exist and are being
quickly plugged in an effort to ensure the sanctity of the process.
In an attempt to further address the increasing concerns, including
with respect to the much-talked-about eligibility for
submission of resolution plans under the Bankruptcy Code, the
President on November 23, 2017 promulgated the Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2017
("Ordinance"), which has come into
force. The Ordinance, amongst other things, attempts to put
safeguards to prevent unscrupulous persons from misusing or
vitiating provisions of the Bankruptcy Code and is aimed to keep
out wilful defaulters associated with non-performing assets from
submitting resolution plans. Our analysis of the amendments are as
under:
Amendment and Analysis
1) Expansion of whom the Bankruptcy Code applies to:
Amendment
Analysis
Bankruptcy Code to also apply to (i) personal
guarantors to corporate debtors; (ii) partnership firms and
proprietorship firms; and (iii) individuals (other than personal
guarantors).
With respect to inclusion of personal
guarantors of corporate debtors, though the Allahabad High Court in
a recent case1 had the occasion to analyse and opine on
the initiation of insolvency process against a personal guarantor,
personal guarantors were not expressly covered within the process
contemplated under the Bankruptcy Code. The Ordinance now brings
the much needed clarity in relation to the applicability of the
Bankruptcy Code to personal guarantors, who now fall within its
ambit. The question of application qua personal guarantors
to corporate debtors will require some additional clarity including
the triggers.
The rationale for including
applicability of Bankruptcy Code to partnership and individuals is
possibly also to facilitate commencement of Part III of Bankruptcy
Code related to insolvency and bankruptcy of individuals.
Inclusion of proprietorship firms is
a welcome step. Since most medium and small enterprises in India
work on a proprietorship model, it was essential to streamline the
mechanism for insolvency and bankruptcy of proprietorship firms.
While the amount of loan availed by such proprietorship is
comparatively less, the number of proprietorship firms availing
loans is significantly high.2 Further, since such
proprietorship firms do not have a primary legislation governing
compliances, the chances of default in repayment of loan is higher.
However, considering the nature of restructuring required for
proprietorship is different from the restructuring required for a
company, there may be need for carve outs to the existing code for
such proprietorship firms in terms of costs, time and keeping in
mind the business environment they operate in and such carve outs
may be focused more on consultation approach. It will also have to
be seen whether the insolvency and bankruptcy proceedings for
proprietorship firms will be carried on under Part III of the
Bankruptcy Code or will new provisions be inserted for the purposes
of such proceedings.
2) Number of applicants:
Amendment
Analysis
The Resolution Applicant means a person who
individually or jointly with any other person, submits a resolution
plan to the resolution professional pursuant to the invitation made
under clause (h) of sub-section (2) of Section 25.
The Ordinance has amended the
definition of a 'resolution applicant'. The
Bankruptcy Code now explicitly allows persons to either singly or
jointly submit a resolution plan.
At the outset, this change will prove
beneficial to persons who wish to jointly present a resolution plan
pursuant to the an invitation in accordance with Section 25(2)(h)
of the Bankruptcy Code and will facilitate acquisition of large
stressed assets.
There are existing implications under
the Competition Act, 2002 in cases where due to the size/value of
an undertaking (either the acquirer or the corporate debtor),
approval from the Competition Commission of India may be required
have still not been addressed and in fact, given the ability of
persons to jointly submit resolution plans, may only get further
exasperated. While the erstwhile Sick Industrial Companies (Special
Provisions) Act, 1985 had specific exemptions to this effect,
similar provisions may also need to be included to the Bankruptcy
Code. This may see the need for additional amendments.
3) Need for invitation and imposition of conditions for the
resolution applicants to fulfil:
Amendment
Analysis
The resolution applicant is required to fulfil
such criteria as may be determined by the resolution professional
with the approval of the committee of creditors, depending upon the
complexity and scale of operations of the business of the corporate
debtor, and such other conditions as may be specified by the
Board.
As a result of the Ordinance, the
resolution professional is required to impose certain criteria for
resolution applicants to fulfil, in order to enable them to receive
an invitation to submit a resolution plan. Further, these criteria
have to be imposed (i) with the prior approval of the committee of
creditors; (ii) having regard to the complexity and scale of
operations of the business of the corporate debtor; and (iii) as
may be specified by the Insolvency and Bankruptcy Board of India
("IBBI");
The said amendment appears to be made
in light of the recent debates related to the credibility, both
financial and legal, of the resolution applicants. The market has
recently been polarized with respect to the eligibility criteria of
the bidders submitting resolution plans for taking over stressed
assets.
4) Barring certain class of persons from submitting resolution
plan:
Amendment
Analysis
The Ordinance mandates that certain classes of
identified persons or any other person acting jointly with such
person or the promoter or any person in management of such person
from submitting the resolution plan.
Promoters of stressed companies have
also expressed interest in submitting resolution plan for their own
companies. In a bid to ensure that past track record of the
resolution applicant is evaluated, IBBI had issued a notification
amending the IBBI (Insolvency Resolution Process for Corporate
Persons) Regulations, 20163, which provided for details
of the applicant of the plan such as identity, conviction for any
offence, identification as a wilful defaulter, details of promoter
etc. to be incorporated in the plan.
The Ordinance now makes certain
persons ineligible to submit resolution plans. A person shall be
ineligible to submit a resolution plan if such person, or any
person acting jointly with such person, or any person who is a
promoter or in the management or control of such person is an
undischarged solvent;
has been identified as a wilful
defaulter by the Reserve Bank of India
("RBI");
whose account is classified as
non-performing asset ("NPA") by the RBI
and period of one year or more has lapsed from the date of such
classification and who has failed to make payment of all overdue
amounts with interest and charges relating to the NPA before
submission of the resolution plan;
has been convicted of any offence
punishable with imprisonment for two years or more;
has been disqualified to act as a
director under Companies Act 2013;
has been prohibited by the Securities
and Exchange Board of India from trading in securities or accessing
the securities markets;
has indulged in preferential or
undervalued or fraudulent transaction in respect of which an order
has been made by the National Company Law Tribunal; or
has executed an enforceable guarantee
in favour of creditor, in respect of a corporate debtor under
Insolvency resolution process or liquidation under the Code.
Further, any 'connected person' in respect of persons
mentioned above, shall also be barred from submitting resolution
plan.
A connected person for the purposes
of the Bankruptcy Code means:
Any person who is promoter or in the
management or control of the resolution applicant; or
Any person who shall be the promoter
or in management or control of the business of the corporate debtor
during the implementation of the resolution plan; or
The holding company, subsidiary
company, associate company or related party of a person referred to
in clauses (i) and (ii).
Has been subject to any disability,
corresponding to above provisions, under any law in a jurisdiction
outside India.
The said amendment appears to be made
in the light of the recent debates related to the credibility, both
financial and legal, of the resolution applicants. The market has
recently been polarized with respect to the eligibility criteria of
the bidders submitting resolution plans for taking over stressed
assets.
The said amendment imposes stringent
limits and constraints on potential suitors who are able to submit
a bid for stressed assets. On the face of it, a number of potential
applicants would stand affected by this amendment and it would now
be obligatory on resolution applicants to disclose all details
about themselves and the persons acting jointly with them for
submission of resolution plans.
The definition of 'connected
person' may also result in unwarranted bar on certain financial
investors'. Moreover, this amendment now affects and brings
within its ambit persons who may have been affected by disabilities
even in jurisdictions other than India.
Imposition of such limits, whilst
arguably warranted, will certainly affect price discovery and will
reduce the ability of the creditors of the company to be able to
recover their debts.
5) Proviso on bar to committee of creditors to sell:
Amendment
Analysis
Proviso to existing Section 30 (dealing
with submission of resolution plan) has been inserted pursuant
to which the committee of creditors shall not approve a resolution
plan submitted before the Ordinance, if the resolution applicant is
ineligible under Section 29A and if no other resolution plan is
available, the resolution professional to invite fresh plan.
Per the Ordinance, committee of
creditors have been barred from approving a resolution plan, which
is submitted before the commencement of the Ordinance, but which is
submitted by a resolution applicant who is ineligible by virtue of
amendments made by way of the Ordinance. The Ordinance thus has
retrospective effect and shall be applicable on the resolution
plans that are already submitted and under consideration.
While the intention may be to bring
transparency and credibility to as many resolution plans as
possible, such retrospective applicability may give grounds to
applicants who have already submitted their resolution plans, to
question the legality of the Ordinance before the Courts, thus
resulting in further delay in the implementation of the resolution
plan. This will further negatively affect the stringent timelines
contemplated under the Bankruptcy Code.
6) Bar on sale to person who does not satisfy the
'resolution applicant' test:
Amendment
Analysis
Proviso to existing Section 35 (Powers and
Duties of Liquidator) inserted that prohibits the sale of
immovable property/movable property/actionable claim of the
corporate debtor to any person not eligible to be a resolution
applicant.
The liquidator is allowed to sell
properties or actionable claims of a corporate debtor under
insolvency to a person who is eligible to be a resolution
applicant.
The amendment ensures that the
liquidator also ensures that the satisfaction of the criteria for
being eligible as a resolution applicant is met before sale of any
property which belongs to corporate debtor is made under the
Bankruptcy Code.
7) Punishment for contravention of the Bankruptcy Code:
Amendment
Analysis
Section 235A inserted to the Bankruptcy Code
which provides that any contravention of the Bankruptcy Code or the
rules or regulations for which no penalty or punishment has been
prescribed shall be punishable with fine of not less than INR
100,000 but which may extend to INR 20,000,000.
The referenced amendment shall ensure
that the violation of any of the provisions enacted by the
Ordinance, for which no specific penalty stands imposed already,
shall be punishable with fine. The quantum of the high fine shall
act as a deterrent against any violation.
8) Further powers to IBBI:
Amendment
Analysis
The Ordinance amends the existing Section 240
(Power to Make Regulations) giving IBBI power for making
regulations under Section 25(2)(h) and Section 30(4).
For the purposes of empowering IBBI
for notifying any further regulations that may be needed to achieve
the objective of the Ordinance, amendment has been to bring
promulgation of regulations further to the newly inserted Section
25(2) and Section 30(4) within the scope of IBBI under Section
240.
Conclusion
While the Ordinance is designed to streamline the process of
credible bidding by removing the backdoor entry of promoters (and
connected persons), the impact of the Ordinance in ensuring
effective sale of stressed assets is yet to be seen. Imposing such
wide eligibility criteria as sought to be done by the Ordinance,
will restrict the number of participants and may affect price
discovery.
Impact on M&A
It will be interesting to see how promoters, who have defaulted
due to factors beyond their control, especially in sectors like
infrastructure (e.g. delay in obtaining approvals, litigations
pertaining to land etc.), and now are barred from submitting
resolution plans, choose to react to the Ordinance. Further, the
ramifications of who is now rendered ineligible to participate may
have unintended consequences and may bring within its fold
financial investors.
One would expect parts of this Ordinance to be challenged by
persons who fall under the just introduced Section 29A of
the Bankruptcy Code, where those persons have already submitted
resolutions plans prior to the Ordinance, which are under
consideration. This may throw up its fair share of litigation at
various Courts, which may effectively work to derail the ongoing
time bound process under the Bankruptcy Code.
1 Sanjeev Shriya v. State Bank of India & others C.
No. 30285 of 2017
2The Fourth All-India census of MSMEs published in 2011
reported a total of 36 million MSMEs
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