The Insolvency and Bankruptcy Code (Amendment) Act, 2019, seeks to reduce delays in the resolution process because there has been extensive litigation on various aspects of the IBC. A resolution plan can provide for comprehensive corporate restructuring schemes such as mergers, demergers and amalgamations under section 5(26).
The inclusion of mergers, amalgamations and arrangements as part of resolution plans follows a landmark NCLT judgment in the case of Edelweiss Asset Reconstruction Company (2019), in which the resolution plan was approved with a proposal for amalgamation of related parties that followed the timeframes prescribed under the code.
Merger, demerger, restructuring and amalgamation could give a significant advantage to both stressed business entities as parties to a resolution process owing to the characteristics of a transfer of assets and liabilities by operation of law pursuant to an order under the IBC. This would provide greater security to acquirers both as to the quality of assets as well as limitations on liabilities. The 2019 Amendments will also increase the number of M&A transactions considering that mergers and amalgamations are market driven and hence are impacted by economic drivers and market sentiment as well as by regulatory regimes. The 2019 amendment will lead to easier M&A transactions because of the predictability of (i) outcome on quality of assets, (ii) limitation of liabilities and (iii) timeframe.
The deadline for completion of the corporate insolvency resolution process (CIRP) is 330 days, including litigation and other judicial processes. The use of inclusive language regarding timeframes for the completion of CIRP within 330 days makes the milestone mandatory, notwithstanding any outstanding litigation and judicial processes. These have been causing delays resulting in all milestones under the code being missed.
There is a mandatory requirement for resolution plans to provide for the payment to operational creditors a minimum of either the amount payable to such creditors on liquidation or such amount payable to such creditors if the total amount distributable under the resolution plan is treated as a liquidation process and paid.
Resolutions plans are required to provide for payment to dissenting financial creditors of at least the amount payable to such creditors on liquidation. Operational creditors and dissenting financial creditors had been facing an unintended predicament of choosing between two equally unpalatable outcomes. The disadvantageous position they were placed in against the non-dissenting creditors in the resolution process threatened to make them worse off than receiving what they were entitled to, even in the event of liquidation. This resulted in operational creditors and dissenting financial creditors registering dissent and bringing litigation. The protection now provided to the operational creditors and dissenting financial creditors enables the resolution process to proceed faster with reduced dissent and litigation during the proceedings.
Where a class of financial creditors on the committee of the creditors is represented by an authorized person, such person shall vote on behalf of the entire class on the basis of the decisions taken by a majority of the creditors, present and voting, that they represent.
Disputes concerning technicalities in the proceedings of the committee of creditors (CoC) over the representation of different financial creditors in a single class of creditors through an authorized person, showed a need for clarity as to whether such a class of creditors needs to conduct itself as a class when represented as a class through an authorized representative. Such technicalities were derailing the progress of the resolution and proceedings of the CoC and the amendment should resolve the problem and enable the smoother functioning of CoCs.
The 2019 amendment clarifying that a resolution plan once approved is also binding on government authorities will enable a smoother implementation of the plan.
The 2019 amendment seeks to ensure time bound resolution of the corporate debtor facing insolvency, to bring clarity in treatment of various classes of creditors and the dynamic nature of a resolution plan. This results from the inclusion of merger, demerger and amalgamation in the design of a resolution plan.
After much litigation compromised the purpose of the code, the 2019 amendment represents a welcome attempt to bring its commercial orientation and focus back on track and to improve its main objective which is to have a time bound approach for maximization of value of distressed assets, to promote entrepreneurship, to increase the availability of credit and to balance the interests of all stakeholders.
(This article was originally published in India Business Law Journal - https://www.vantageasia.com/commercial-primer-ibc-amendments/)