Insolvency and Bankruptcy Code, 2016, Amendment – March 2020

Insolvency and Bankruptcy Code, 2016 [1] (hereinafter referred to as “The Code”) is a legislation developed in the contemporary times. A bill introduced in the parliament that receives ratification from both the houses and the President of India becomes a law and the stakeholders have to abide by the same. However, every law is subject to change due to the dynamic nature of prevailing and varying circumstances which is why they are amended. For the same reason, The Code, being a fairly young legislation, has been a subject to amendments since its inception. The latest amendment made in The Code was in 2019 (updated up till March 2020). The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 [2], was introduced to remove certain ambiguities in some provisions and to bring more coherence in the law [3]. This article aims to identify the amendments made in The Code and also to provide a brief analysis of the same.

Section 5(12) – Insolvency commencement date

Section 5 (12) of The Code lays down the definition of insolvency commencement date. According to the original provision as per The Code, the commencement date of insolvency was considered to be the date on which the Adjudicating Authority admitted the application for insolvency. It also contained a proviso (provided that), which stated that in the event the Interim Resolution Professional [4] (hereinafter referred to as “IRP”) was not appointed by the time the application for insolvency was admitted then the commencement date would be considered to be the date on which the IRP was appointed. However, this provision propelled certain level of confusion and became a subject of indecisiveness for the course of insolvency process. Thus, to prevent any further uncertainty, the said proviso was removed from The Code. The status of commencement date of insolvency remains only the date on which the Adjudicating Authority admits the application. Furthermore, to bring uniformity in the process, an amendment has been made to the appointment of the IRP as well (Section 16(1)) by means of this ordinance. The IRP was required to be appointed made within 14 days of the commencement date of insolvency before the present amendment. Now, the Adjudicating Authority is required to appoint the IRP on the same day the insolvency application is admitted.

Section 7 – Initiation of Corporate Insolvency Resolution Process (CIRP) by financial creditor

This provision empowers the financial creditors of a corporate debtor to bring forward an application for insolvency before the Adjudicating Authority for defaulted payment [5]. The provision permitted a financial creditor to file the application for CIRP either in an individual capacity or with other financial creditors. This provision consequently encouraged several creditors to file an application against real estate companies which created a large bank of pending insolvency applications. The present ordinance amended this provision and added a proviso. It states that an application for insolvency can be made jointly by financial creditors, falling in the ambit of Section 21 (6A) (a) and (b). In such an application, minimum one hundred (homogeneous) financial creditors or one-tenth of the total number of financial creditors are required to file together. Whichever number is lower will be applicable. The same capping has been implemented for allottees in a real estate project. The amendment also provides for the consequence in case the application is not admitted by the Adjudicating Authority due to non-compliance of the abovementioned provisos. In such a case, the petitioners would be awarded a period of 30 days to rectify the difference and reapply. If not done within the said period, the application will stand withdrawn.

Section 11 – Persons unentitled to apply for insolvency

This original provision provides for a list of persons who are not permitted by The Code to file an application for insolvency before the Adjudicating Authority. These persons include the following: a. Corporate Debtor sustaining CIRP; b. Corporate Debtor discharged CIRP twelve months prior to the application; c. Corporate Debtor making an application in violation of the resolution plan approved twelve months prior to the same; or d. Corporate Debtor who is legally liable for the liquidation process. However, in the present ordinance, The Code has been amended and in two-fold explanations, the ambit of Corporate Debtor has been widened. As per the recent amendment in first explanation, a corporate debtor now by its definition is inclusive of a corporate applicant. The second explanation states that the corporate debtor mentioned in the clauses of section 11 mentioned above, would not restrict the said corporate debtor to initiate an application for insolvency against another corporate debtor [6].

Section 14 – Moratorium

This provision provides for the declaration for an order of moratorium period by the Adjudicating Authority once the application for insolvency has been admitted. The provision prohibits certain activities against the corporate debtor once the moratorium period commences [7]. The present ordinance amended section 14 (1) by way of adding an explanation. It stated that any license, registration, concession etc, issued by the Central government or any other appropriate authority to the corporate debtor would not be terminated or cancelled solely because it is undergoing CIRP. However, this proviso is subject to whether such license was the cause for the defaulted payment in the first instance. Moreover, sub-section 2A has been inserted to this provision. This essentially states that if the IRP or RP (resolution professional) opines that supply of certain goods or services is crucial to keep the operations of the corporate debtor as a going concern, then such services or goods would not be revoked or terminated. This is also subject to the case where the corporate debtor has cleared any dues against such goods or services. Section 14 (3) has also been amended in this ordinance which earlier stated that the provision under section 14 (1) would not potentially be applicable to agreements, undertakings or other negotiations as notified by the central government with due consultation of the financial sector regulator. However, in the present amendment, the provision has widened the scope of consultation for the central government as it states that the government can consult with the financial sector regulator or any other authority implying that an authority which the central government deems appropriate.

Section 23 – RP conducts CIRP

This provision binds the RP to conduct the insolvency resolution process and ensure the operations of the corporate debtor as a going concern without any fallout. By way of this ordinance, an amendment has been made in this provision wherein a proviso has been added. IT states that the RP has to continue to govern the operations of the corporate debtor until either the resolution plan is put in motion or the liquidation process has been ordered by the Adjudicating Authority.

32 A – Discharging the corporate debtor from any liability arising from any offence committed prior to the commencement of the insolvency process

Section 32 A has been added to The Code through the present amendment which essentially provides immunity of sorts to the corporate debtor from any liability which arises from an offence(s) it committed prior to the commencement of the present insolvency process. The provision states that the corporate debtor would be free from being prosecuted for commission of abovementioned offence if the approved resolution plan requires for a change in management and working personnel. There are conditions provided for such management to retain the immunity; a. The person in new management must not be related to or have been a promotor of the corporate debtor; or b. The person must not have any investigation or report against him from relevant authority making him liable of abetting or being a part of the offence. However, if a prosecution is nonetheless instituted against the corporate debtor under the abovementioned circumstances, then at the execution of the resolution plan, it will stand discharged of any liability arising from such prosecution by virtue of Section 32A. Amendments mentioned above are a few important changes that have been introduced by way of the ordinance. In addition to those, there has been a change in the scope of The Code, wherein, proviso of Secion1 (2) has been omitted from the legislation which removed Jammu and Kashmir from the extent of the scope of Part III of this legislation. With the ongoing scrutiny over the legal analysis and implementation of The Code, further amendments can be expected in the future along with new regulations and rules being introduced to meet the current requirements [8]. References: [1] https://www.indiafilings.com/learn/insolvency-and-bankruptcy-code-2016/ [2] https://ibbi.gov.in//uploads/legalframwork/547c9c2af074c90ac5919fa8a5c60bd4.pdf [3] https://www.ibbi.gov.in/uploads/whatsnew/accd26be086a483a987bab96e942be69.pdf [4] https://www.indiafilings.com/learn/how-to-become-an-insolvency-professional/ [5] https://www.indiafilings.com/learn/corporate-insolvency-resolution-process/ [6] https://www.indiafilings.com/learn/insolvency-and-bankruptcy-code-second-amendment-2019/ [7] https://www.indiafilings.com/learn/stages-of-corporate-insolvency-process/ [8] https://www.indiafilings.com/learn/changes-to-insolvency-bankruptcy-act-covid-19/