A spate of important reforms to the existing insolvency resolution framework in India have been announced, which can provide much-needed relief to various sectors of the economy reeling under insolvency.
The Insolvency and Bankruptcy Code, 2016 (“IBC”) has changed the landscape with respect to dealing with insolvency and restructuring in India. The Government has introduced various amendments to the IBC from time to time to make it more effective. The latest amendments to the IBC under the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“Amendment Act”) were enacted and notified on March 13, 2020. The Amendment Act brings into effect various key amendments to the provisions of the IBC in order to fill certain gaps and address various challenges being faced in the corporate insolvency resolution process framework :
(a). Minimum thresholds introduced for financial creditors: The Amendment Act has stipulated that: (a) financial creditors belonging to a class of creditors comprising of at least 10 members other than creditors coming under the ambit of Section 21(6) of the IBC; and (b) financial creditors holding financial debt in the nature of securities/deposits which provide for appointment of a trustee/agent to act on their behalf, can only file an application for initiation of corporate insolvency resolution process (“CIRP”) jointly with not less than 100 of such creditors in the same class, or not less than 10% of the total number of such creditors in the same class, whichever is less.
However, the Amendment Act does not introduce a similar minimum threshold for any financial facility extended as part of a consortium arrangement or syndicated facility as per Section 21(6) of the IBC.
Therefore, while holders of secured debentures for which appointment of a debenture trustee is statutorily mandated would be required to file a joint application with at least 100 other debenture holders or at least 10% of the total number of debenture holders of such company, whichever is less, in case such financial debt is through a consortium arrangement whereby all members of the consortium appoint a security trustee or a lenders’ agent to act on behalf of all members, such members can still individually file an application under Section 7 of the IBC.
In case of financial creditors who are allottees of any real estate project, such application would be required to be filed jointly by not less than 100 allottees under the same real estate project or not less than 10% of the total number of allottees under the same real estate project, whichever is less. Generally, allottees can ascertain the total number of allottees under any real estate project from the data compiled on the website of Real Estate Regulatory Authority (RERA) for registered real estate projects.
Though the Amendment Act provides for a time period of 30 days from March 13, 2020 to rectify all applications filed post December 28, 2019 to comply with such minimum threshold requirements for financial creditors, it is pertinent to note that the Hon’ble Supreme Court has on March 23, 2020 directed the period of limitation in all proceedings shall stand extended with effect from March 15, 2020 till further orders, in light of the novel coronavirus outbreak and nationwide lockdown in effect currently in India.
The Government of India has also recently increased the minimum threshold amount for invocation of CIRP from INR 1,00,000/- to INR 1,00,00,000/- so as to exclude micro, small and medium enterprises (MSMEs) from being admitted under IBC.
(b). Suspension/termination of concessions, licenses etc.: The Amendment Act has introduced an amendment under Section 14 of the IBC to stipulate that concessions, licenses, permissions, clearances and other similar rights/grants which have been granted by any governmental/statutory authority, cannot be suspended/terminated on grounds of insolvency of the corporate debtor, as long as all dues for such grant are being paid. Such dues can be paid as ‘insolvency resolution process costs’ incurred by the resolution professional for running the business of the corporate debtor as a going concern under the IBC.
The amendment will enable the operation of the business of the corporate debtor as a going concern during the moratorium period and will encourage successful insolvency resolution of corporate debtors which belong to sectors that are largely dependent on the continuation of such grants/rights. For example, project developers are generally structured as special purpose vehicles which are granted concessions/rights for the development/implementation of infrastructure projects. However, the concession agreement entered into for grant of such concession would typically provide termination rights to the governmental authority in case of insolvency of the project developer. If such termination of the concession is permitted, it would result in negating the possibility of a viable insolvency resolution, and the project developer would then be driven towards liquidation, thereby eroding value for all stakeholders. Similar issues would also be faced for beneficiaries of long-term industrial leases granted by governmental authorities.
Prior to the amendment, in case any governmental authority terminated a concession, license, permission or other similar rights due to the insolvency of the corporate debtor, resolution professionals general sought reliefs from the Hon’ble National Company Law Tribunal (“NCLT”) under Section 60(5) of the IBC to ensure the continuation of such rights, and the NCLT would typically grant such reliefs. In the matter of Embassy Property Developments Private Limited v. State of Karnataka, the Government of Karnataka rejected the application of the resolution professional for deemed extension of mining leases held by the corporate debtor under the Mines and Minerals (Development and Regulation) Act, 1957. Upon being approached, the NCLT set aside the order passed by the Government of Karnataka on the ground that the same was in violation of Section 14(1) of IBC. However, the Hon’ble Supreme Court held that the correctness of the said decision can be called into question only in a superior court which is vested with the power of judicial review over administrative actions, since such extension would be the subject-matter of ‘public law’, and not the NCLT under Section 60(5) of the IBC.
Therefore, the aforesaid amendment will bring much-needed relief to stakeholders of such corporate debtors which are beneficiaries of such concessions, licenses and permissions, since the amendments would have an overriding effect in case of any inconsistency with other applicable laws in view of section 238 of the IBC.
(c). Statutory immunity against liability for prior offences: The Amendment Act has introduced Section 32A providing for statutorily-recognized immunity of the corporate debtor, successful resolution applicants as well as persons who have acquired assets in liquidation upon the fulfilment of certain specified conditions. The newly introduced Section 32A stipulates that the liability of corporate debtors for offences committed prior to the commencement of CIRP would automatically stand discharged, and no action for seizure/attachment of assets can be taken against corporate debtors, successful resolution applicants or persons acquiring assets in liquidation, as long as an erstwhile promoter, any person in control of management of the corporate debtor, the related parties of the corporate debtor or any persons who have abetted the commission of such offence do not acquire control of the corporate debtor post completion of the CIRP or do not acquire control of its assets in liquidation. Therefore, once a resolution plan providing for payments to statutory creditors as mandated under Section 30(2) of the IBC is sanctioned by the NCLT, all such proceedings against the corporate debtor or its assets would stand automatically discharged and extinguished.
Prior to the introduction of Section 32A, resolution applicants would typically seek such reliefs for extinguishment and settlement of all past actions and liabilities from the NCLT under their resolution plan and therefore, resolution applicants had to factor in potential risks and costs which could be incurred for defending various challenges initiated against the implementation of the resolution plan by various statutory creditors as part of their cost of acquisition of the corporate debtor. Further, the statutory creditors’ non-acceptance of payments made under the resolution plan as being in full and final settlement of all statutory dues of the corporate debtor would also hamper ease of doing business for the corporate debtor/successful resolution applicant. Section 32A of the IBC will result in a ‘clean slate’ being accorded to the corporate debtor and the successful resolution applicant in order to enable it to recommence its business operations without this overhang, which will bolster the viability of insolvency resolution of the corporate debtor and maximize the value of its assets for all its stakeholders, which is in keeping with the objectives of the IBC.
Section 32A clarifies that erstwhile designated partners in case of limited liability partnerships and officers who are in default in case of companies, who have directly or indirectly been involved in the commission of such offences, would continue to be liable to be prosecuted and punished for such offences under applicable law, while corporate debtors would be required to co-operate and assist the authorities investigating such offences.
(d). Interim finance to include certain notified debts: The Amendment Act has amended Section 5(15) of the IBC to provide for notified debts to form part of ‘interim finance’ under the provisions of the IBC. The IBC provides for priority repayment of interim finance amounts under resolution plans as well as from liquidation proceeds. The Government of India has also recently (on March 18, 2020) notified debts raised from the ‘Special Window for Affordable and Middle-Income Housing Investment Fund I’, which is an alternative investment fund sponsored by the Government of India for providing priority debt financing for stalled housing projects that are in the affordable and middle-income housing sector, as ‘interim finance’ for the purposes of the IBC. This is an important development for the real estate sector which has recently been largely affected by insolvency of several real estate project developers.
(e) Supply of essential goods and services: The Amendment Act has amended Section 14 of the IBC to clarify that where the resolution professional considers the supply of goods or services as being critical for protection and preservation of the value of the corporate debtor, and in order to manage the operations of the corporate debtor as a going concern, then the supply of such goods or services cannot be terminated or suspended during the moratorium period, subject to the corporate debtor continuing to pay all dues for such supply during the moratorium period. Such dues can be paid as ‘insolvency resolution process costs’ incurred by the resolution professional for running the business of the corporate debtor as a going concern under the IBC. Therefore, the ambit of essential goods or services for the corporate debtor would no longer be restricted to only those specifically recognized under Regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the resolution professional would have flexibility to determine which goods or services are essential in nature, given the nature of the underlying business and assets of the corporate debtor.
(f). Timelines for appointment of interim resolution professionals: The Amendment Act has amended Section 16 of the IBC which earlier provided for a time period of 14 days from the date of passing of the admission order by the NCLT for appointment of the interim resolution professional by the NCLT. The amendment has been introduced to provide increased time for completion of other actions envisaged under a CIRP, considering that most CIRPs have not been completed within the 270-day time period prescribed under the IBC.
(g). Management of operations of the corporate debtor till commencement of liquidation: The Amendment Act has clarified in Section 23 of the IBC that resolution professionals should continue to manage the operations of the corporate debtor post expiry of the insolvency resolution process period till an order for appointment of liquidator is passed by the NCLT. The amendment provides for specific statutory authorization to the resolution professional to continue to manage the affairs of the corporate debtor during the interim period, and thereby does away with the necessity of seeking additional directions in this regard from the NCLT.
The aforesaid reforms to the existing insolvency resolution framework in India address several existing issues and gaps in legislation, protect and preserve the going concern nature of corporate debtors, and provide much-needed relief to various sectors of the economy reeling under insolvency. This, in turn, will maximize the value of assets of corporate debtors, promote entrepreneurship and availability of credit, and balance the interests of all stakeholders in keeping with the objectives of the IBC.
Ajay Shaw is a Partner, Ashish Pahariya is an Associate Partner and Soham Mookherjee is a Senior Associate at DSK Legal