As of 31 March, 525 corporate debtors were undergoing resolution under the Insolvency and Bankruptcy Code, 2016. Resolution plans had been approved for 22 of them and 87 liquidations had commenced, all in 15 the months since proceedings under the code commenced. Based on early experience with the code and recommendations in a recent report by the Insolvency Law Committee, the Insolvency and Bankruptcy (Amendment) Ordinance, 2018, was promulgated by the president on 6 June.
On the applicability of the Limitation Act, 1963, to proceedings under the code, the ordinance has set to rest uncertainty resulting from decisions by the National Company Law Appellate Tribunal by introducing section 238A to the code, confirming the applicability of the Limitation Act to insolvency proceedings.
The ordinance deals with the definition of “financial debt” in section 5(8)(f) and in the explanation gives amounts raised from “allottees” under “real estate projects” the effect of commercial borrowings, as defined in the Real Estate (Regulation and Development) Act, 2016. This gives home buyers the opportunity to appoint authorized representatives to represent them in the committee of creditors. While this clarification allows improved recovery to home buyers under the section 7 of the code, it will be important to see if the legislative intent is met as they will be classified under unsecured financial creditors.
The ordinance requires resolution applicants to submit an affidavit of eligibility to certify their ability to bid under section 29A of the code.
Section 9(3)(c) of the code mandates the furnishing of a certificate from financial institutions maintaining accounts of the operational creditor confirming the existence of the operational debt. Following the Supreme Court decision in Macquarie Bank Ltd v Shilpi Cable Technologies Ltd, the ordinance has relaxed this requirement, making such documentation optional, with the intention of avoiding genuine and serious inconvenience.
A new section 12A has been added to the code which makes withdrawal of corporate insolvency resolution process applications permissible after admission under the code provided it is backed by 90% of the voting shares in the committee of creditors. However, no withdrawal may be made after the bidding process commences. In Lokhandwala Kataria Construction Pvt Ltd v Nisus Finance and Investment Managers LLP, the Supreme Court extended rule 11 of the National Company Law Tribunal Rules, 2016, to permit the tribunal to recognize settlement after admission of insolvency applications. This is being looked at as a positive revision.
Following the principles laid down in IDBI Bank Ltd v BCC Estate Pvt Ltd, the ordinance has created an exception to the declaration of moratorium for sureties in contracts of guarantee to corporate debtors under section 14, which means that the assets of corporate guarantors have no protection under section 14 and creditors can initiate action against them.
To ease and expedite proceedings, the ordinance has lowered the voting requirement in the committee of creditors for extension of the time limit to complete the corporate insolvency resolution process and for appointment of resolution professionals (RPs) from 75% to 66%. Further, day-to-day decisions now require only 51% of the vote instead of 75%.
The ordinance clarifies that an RP’s mandate does not end at the expiration of one year. An RP remains in charge until all relevant permissions and procedures are satisfied.
The ordinance provides that shareholder approvals prescribed under Companies Act, 2013, will be deemed to have been obtained in cases of resolution plans providing for mergers, to avoid duplication.
Finally, the ordinance has amended section 434 of the Companies Act to provide that litigants can choose to transfer winding-up proceedings to the National Company Law Tribunal from the high courts to expedite the process of disposal and to make the provisions of the code directly applicable.
The ordinance is well timed to iron out the creases in the recovery, insolvency and bankruptcy laws in India. Most remarkable is the pace at which lawmakers and regulators are responding in unprecedented turnaround time to resolve difficulties that have arisen as the code comes into full play. The intent and the agenda are clear, and it is showing in action.
(This article was originally published in India Business Law Journal - https://www.vantageasia.com/timely-ordinance-replies-resolution-process-feedback/)