Ten Salient Features of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018June 7 2018
By Prachi Johri
1. This amendment ordinance makes the Limitation Act applicable to insolvency proceedings – section 238A introduced
This clarifies a large confusion brought up again and again in various orders including Black Pearl Hotels Pvt. Ld. v. Planet M Retail Limited. A lot of time-barred claims were being filed since the Hon’ble NCLAT had opined that limitation would apply only from 2016 when the Code came into force. The practice was discouraged by the Principal Bench, NCLT but the decision of the NCLAT was regularly cited leading to conflict. The issue is now resolved.
2. Amount raised from allottee of a real estate project is included in the definition of financial debt. The class of creditors has been permitted to be represented by a qualified RP if the IRP of corporate debtors makes an application to the Adjudicating Authority (Section 6A). Such RP who becomes authorized representative of a class of creditors is also to be paid remuneration as per newly introduced Section 6B.
This amendment and introduction of new provisions greatly clears the air with respect to flat-buyers and is slated to be a big move in ensuring that the disgruntled flat-buyers are able to pursue the remedy under the Code. The monthly/assured returns conundrum that the NCLAT had introduced in the case of Nikhil Mehta v. AMR Infrastructure has been left out by the Ordinance though the introduction into the definition uses the words that the financing from the allotteee must have the effect of commercial borrowing. The Ordinance does not stop at introduction of flat-buyers into the definition of flat-buyers but also provides for appointment of an authorised representative who may represent the flat-buyers at the CoC. This is far-sighted as this would avoid CoC meetings to become confusing and impossible to manage. However, priority of banks and flat-buyers has now become the same in order of payment.
3. Section 30 now requires a mandatory certificate on affidavit for eligibility as a resolution applicant
This confusion had arisen in several matters including the matter of Liberty House Group Pte Ltd. v. Bhushan Power and Steel Limited. It was time and again contended that Section 29A does not introduce a pre-eligibility requirement and the RP’s powers to ask for undertakings and affidavits fro Section 29A eligibility was limited to examining the same at the time of opening the resolution plan and its consideration. The Ordinance clarifies that a prior affidavit is to be sought. It is expected that the format of the affidavit may come to be prescribed by amendment to regulations framed under the Code.
4. Section 9(3)(c) certificate is now to be filed “if available”
It has been held by the Supreme Court that the certificate under Section 9 (3)(c) from the financial institution is to be filed only where available. As a matter of practice, showing that effort was made to procure the certificate would suffice to get application under Section 9 admitted. This position has now become crystallized in the words of the statute. This resolves a genuine grievance of many applicants regarding non-cooperation from banks. This also resolves the time and effort being put by the NCLT to summon banks and seek reasons.
5. Section 12A introduced to recognise settlement after the commencement of insolvency
This was a major grey area and the hands of NCLAT and NCLAT were tied since the Supreme Court in the case of Lokhandwala Kataria Construction Pvt Ltd v. Nisus finance and Investment Managers LLP had observed that the power to recognize settlement after admission of insolvency was not present in the Code and only the Supreme Court could recognize such settlement under Article 142.
As such, it was widely criticized that exercise of extraordinary power under Article 142 by the Supreme Court had become a matter of course. Moreover, conflicting judgments had started to be passed by various NCLT Benches recognizing settlement under Rule 11 of NCLT Rules, 2016 that provides for inherent powers. The consistent view of the NCLAT was that Rule 11 NCLT Rules does not apply to the Adjudicating Authority under the Code. This issue now stands resolved with the NCLT and NCLAT being empowered to recognize settlement post admission of application.
6. Surety in a contract of guarantee to a corporate debtor is not covered in the moratorium under section 14.
The issue regarding guarantors and sureties had become hotly contested and a larger bench of the NCLT had been seized of the issue.
7. Section 22 to confirm IRP to RP – now only 66% votes needed at COC not 75%
This amendment makes the process of confirmation of IRP easier. In fact throughout the Code various voting thresholds have been reduced from 75% to 66%. This could be keeping in mind that high threshold of voting at 75% was leading to deadlock in the COC and the NCLT was being approached for breaking such deadlock. Majority of 66% might be easier to obtain and COC will become more effective and efficient.
8. Section 23- RP to manage the company till resolution plan is approved by the adjudicating authority. Section 31(4) introduced that RP is to get plan approved with all permissions within 1 year of approval of resolution plan by COC
A question had arisen as to when the RP becomes functus officio and if the Adjudicating Authority is seized of the matter then who continues to manage the corporate debtor till such time. The amendments clarify that the RP is to continue to remain in charge. The broad timeline of 1 year has also been prescribed for the RP to get all relevant permissions once the resolution plan is approved by the COC. The question for the exclusion of time spent in litigation before the Adjudicating Authority which has now become law after the orders in Quantum Limited v. Indus Finance Corporation has not been addressed.
9. Section 30(2) (f) if plan requires approval of shareholders then the same is deemed to be given
This position was clarified by the Ministry of Corporate Affairs vide General Circular Bo. IBC/01.2017 issued on 2510.2017 stating that consent of shareholders which would otherwise be required under the Companies Act, 2013 is deemed to have been given if an action is taken under the Resolution Plan.
The same position is now crystallized in law. this is important since the resolution plans providing for mergers ought not to be subject to the process of the Companies Act for getting approvals. This question was a pending consideration before the NCLAT in the matter of Edelweiss Asset Reconstruction Ltd v. Mamta Binani and Others.
10. Proviso to section 434 Companies Act has been introduced that where a winding up petition is pending in the high court the petitioner may apply for transfer of proceeding to the Adjudicating Authority and to treat the petition as one under the insolvency code.
This amendment has now given the litigants an option to opt for a faster and more effective remedy under the Code even where notice has been issued and the High Courts are actively seized of winding up petitions. It is likely that if more than one winding up petition is pending before the High Court and one petitioner chooses to get its case transferred to one under the Code, there might be duplicity of proceedings.
The Author is an Advocate practising in Delhi.
Read OrdinanceIBC Ordinance - June 6, 2018
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