On 23th November 2017, the President of India has promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2017 ("the Ordinance"). In order to achieve the underlying objective of the Code i.e. insolvency resolution of corporate persons in a time bound manner for maximization of assets of such persons, the Ordinance brought major amendment to the criteria for who can be the resolution application. The Ordinance intends to checkmate unscrupulous promoters who are trying to buy back their assets paying a fraction of what they originally owned lenders.
The Ordinance inserted section 29A in the Code, which provide the criteria for persons not eligible to be resolution applicant. The said provision bar promoters of defaulting companies from submitting a resolution plan in front of Committee of Creditor and Insolvency professional. Besides promoters, the provision creates a list of persons who are ineligible to present resolution plan, which includes persons who are undischarged insolvents, those who are wilful defaulters (as stipulated by the Reserve Bank of India), disqualified directors under Companies Act, 2013, persons convicted for offences punishable with imprisonment of at least two years, persons prohibited by the Securities and Exchange Board of India from trading in securities or accessing the capital markets and certain other categories as mentioned in the Ordinance. Consequently, the Ordinance bars not only the willful defaulters, but also several other categories such as guarantors to the debtor.
The Ordinance prohibits the Committee of Creditors from approving a resolution plan submitted before the promulgation of this Ordinance, where the plan has already been submitted by a person ineligible to be a resolution applicant. In such cases, the Committee of Creditors has to call for Fresh Resolution Plan. The Ordinance has also put regulation on the person who can buy the moveable or immovable property of the debtor in the liquidation. The Ordinance inserted a proviso under section 35 of the Code that the liquidator shall not sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant.
The Ordinance clarifies the position of personal guarantor of the corporate debtor also. The Ordinance amends section 2 of the Code which deals with the applicability of the Code. The Ordinance inserted "personal guarantors to corporate debtor" in section 2 clause (e), meaning by the Code is now applicable to the personal guarantor of the corporate debtor. In consequence, it can be interpreted that now during the insolvency process, the moratorium under section14 of the Code will be applicable to the properties of the personal guarantor of the corporate guarantor also.
It would be important to mention that prior to the Ordinance, the Insolvency and Bankruptcy Board of India had vide its notification dated 7th November 2017 inserting new regulation after sub-regulation (2) under Regulation 38 in Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate persons) Regulation, 2017. Under the New Regulation, the Board has made mandatory that the resolution plan should contain details of the resolution applicant and other connected persons. The 'details' includes identity, conviction of any offence, if any, during the preceding five years, identification as willful defaulter, if any, by any bank or financial institution or consortium, etc.
Now, after the present amendment in the Code by way of the Ordinance both the Code and Regulations are harmonious. The outcome of this will be that the probability of successful resolution of the corporate debtor will be on higher side as the corporate debtor will be handed to person/entity with clean background.
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