INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2020 

In the current scenario, Insolvency and Bankruptcy Code (Hereinafter called  “Code”) declined towards recovery instead of fulfilling the core objectives of this code. “Recovery is incidental under the Code. Its primary objective is rescuing companies in distress." ­­– Dr. M.S. Sahoo (Chairperson, Insolvency and Bankruptcy Board of India) The above quoted words of Dr. Sahoo from his article in the print edition of Indian Express on March 14, 2020 under the title: 'The real reform', form the underlying theme of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Hereinafter called “Code 2020”)

The Code 2020 was passed by the Lower House of the Parliament on March 6, 2020 and by the Upper House on March 12, 2020.

After receiving the assent of the President, the Amending Statute was published in the Official Gazette on March 13, 2020.

This Article attempts to underscore and unfold the changes introduced in the Code by the Code 2020.

MAJOR KEY HIGHLIGHTS OF THE AMENDMENT

The Code 2020 aims to provide a time bound completion of the insolvency process, confers preference upon secured financial creditors over operational creditors in the matter of distribution of assets upon resolution of a corporate debtor, and lays down the manner of voting by an authorized representative on behalf of the class of financial creditors.

Insolvency commencement date

Under Section 2 of the Code 2020, deletes the proviso from the definition of "insolvency commencement date" u/s 5(12) of the Code such that the insolvency resolution process commences from the date of admission an application for initiating corporate insolvency resolution process (CIRP), and not when the 
Interim Resolution Professional (IRP) is appointed by the adjudicating authority (Hereinafter called as "AA"). The corresponding change brought out in Section 16(1) of the Code mandates the AA to appoint the IRP on the insolvency commencement date, withdrawing the leeway of 14 days from the insolvency commencement date for the appointment of IRP. The above amendment curtails the anticipated delay in completion of resolution to the extent of 14 days.

Expension in Definition of interim finance

The legislature has expanded the ambit of 'interim finance' u/s 5(15) of the Code by insertion of the words "and such other debt as may be notified" at the end of its definition. Interim finance essentially refers to short-term loans required to keep a company under the CIRP running as a going concern. The Code allows an IRP/RP to raise interim finance in order to protect and preserve the value of the property of a corporate debtor ("CD") and to manage its operations as a going concern. In the Code, the term 'insolvency resolution process cost' includes any interim finance raised for a corporate debtor along with the cost of raising such interim finance. The distribution waterfall u/s 53 of the Code provides for the highest priority to be given to insolvency resolution process costs, which includes such interim finance.

Section 7 – initiation of corporate insolvency resolution process by financial creditor

The Code, 2020 raises the minimum threshold for certain classes of financial creditors for initiating CIRP, prescribing that the application by these creditors u/s 7(1) of the Code should be filed jointly by at least 100 such creditors or 10% of their total number, whichever is less. These classes include real estate allottees and security or deposit holders represented by a trustee/agent. The amendment also clarifies that where such an application for initiating the CIRP against a CD has not been admitted by the AA before the commencement of the Code, 2020, such application shall be modified to comply with the aforesaid requirements within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.

This can easily be touted as the most far-reaching amendment to the IBC' 2016 which is likely to be greeted with a constitutional challenge by the homebuyers. It is noteworthy that through the Second Amendment Act of 2018, the government, by inserting an explanation to Section 5(8)(f) of the IBC, had accorded homebuyers the status of financial creditor in order to empower them to be part of the Committee of Creditors (“CoC”). However, builders had challenged the constitutional validity of that amendment before the Apex Court in in Pioneer Urban Land and Infrastructure Limited vs. Union of India. The Apex Court, vide its judgment dated August 9, 2019 held the amendment to be constitutional and rejected the developers' plea. In this matter, the builders had suggested introduction of a minimum threshold for homebuyers to trigger the Code but that was not accepted by the Court on the ground that, "the doctrine of reading down would apply only when general words used in a statute or regulation can be confined in a particular manner so as not to infringe a constitutional right." Hence, the Apex Court having rejected the matter of minimum threshold in view of a perceived legislative lacuna, the legislature has incorporated such requirement in the Code sans over-reaching the Pioneer judgment.

While the legislature has sought to placate the developers from over-exposure to remedial and welfare legislations, the concerns of homebuyers remain with respect to implementation of the amendment. The minimum threshold criteria is fraught with practical difficulties since sale is a continuous process, and how will a homebuyer know how many units have been sold to determine the 10% of total number of units sold in real estate project, especially when 10% s less than 100. That said, the aggrieved homebuyers can still look elsewhere (RERA or COPRA) for redressal of their complaints against the developers and builders.

Corporate debtors entitled to make application

Under section 4 of the Code, 2020 inserts an explanation u/s 11 of the Code which stipulates that a corporate debtor undergoing CIRP or having completed CIRP 12 months preceding the date of making of the application or in respect of whom a liquidation order has been made, etc. shall be entitled to make an application to initiate CIRP against other corporate debtors. This step is likely to enhance the maximisation of value of a corporate debtor. t is pertinent to note that NCLT, Mumbai and NCLT, Delhi had adopted two divergent views in Jai Ambe Enterprise vs. S. N. Plumbings Pvt. Ltd. And  Asian Plumbings and Mandhana Industries Ltd. vs. Instyle Exports Pvt. Ltd. respectively, and there was a pressing need for clarification. Now, with the newly inserted explanation to Section 11, the legislature has settled the debate in agreeing with the NCLT, Mumbai and upholding its viewpoint that it is one of the duties of the RP to recover the outstanding debts of a CD against whom the CIRP is already in progress and it is a right course of action for managing the affairs of the financially stressed company.

Mashrooming the ambit of moratorium

Under Section 5 of the Code, 2020 inserts an explanation to Section 14(1) of the Code which extends the the moratorium under IBC to protect the license, permit, registration, quota, concessions, clearances and other similar grants or rights given by the Central or State Government, local authority, sectoral regulator or any other authority from suspension and termination during the CIRP, unless there is a default in payment of the current dues for its use or continuation during the moratorium period. This amendment was necessary in view of the Supreme Court  ruling in Embassy Property Development Pvt. Ltd. v. State of Karnataka, Civil Appeal No. 9170 of 2019, dated December 3, 2019, wherein it dealt with the issue of deemed extension of lease granted by the government. it was observed by the Apex Court that the purpose of moratorium is only to preserve the status quo and not to create a new right, and that Section 14(1)(d) only prohibits the right not to be dispossessed, but not the right to have renewal of the lease of such property. The newly inserted explanation to Section 14(1) augments the hopes of a CD facing CIRP, and advances the intent of IBC to preserve the status of a CD as a going concern. It also does well to premise such protection on the payment of current dues.
The amended Section 14(3)(a) protects not only the transactions from moratorium now, but also agreements or other arrangements notified by the Central Government.

Section 23 management Of operation of CD

 The substitution of the Proviso u/s 23(1) of the Code clarifies that a RP shall continue to manage the affairs of the CD till the Resolution Plan is approved by the AA u/s 31(1)till the appointment of a liquidator u/s 34 by the AA in the event of rejection of the resolution plan for failure to meet requirements mentioned in Section 30. This is expected to ease the functioning of a RP and dispenses with the requirement of filing endless applications seeking suitable direction/s. It also expressly authorises management of affairs by RP during the interregnum from the rejection to RP till appointment of liquidator.

Introduction of  Section 32 A in this code

The insertion of Section 32A in the Code is the most significant amendment brought out by the Government, that strives to shield the successful resolution applicants and their property from the threat of criminal proceedings qua the offences committed by the former promoters of the CD.

provides that the liability of a CD for an offence committed prior to the commencement of the CIRP shall cease and the CD shall not be prosecuted for such an offence from the date on which the resolution
plan has been approved by the AA u/s 31 of the Code.

Also, the proviso to Section 32A(1) provides for discharge of a previous prosecution, instituted during the CIRP against such CD, from the date of approval of the resolution plan.

Notwithstanding the immunity given, Section 32A makes it mandatory for the CD and/ or any person who may be required to assist or co-operate with any authority investigating an offence committed prior to the commencement of the CIRP, to provide necessary assistance and co-operation.

Section 227 Financial service provider

The newly inserted explanation to Section 227 of the Code provides that the proceedings for insolvency and liquidation for financial service providers or categories of financial service providers maybe conducted with such modifications and in such manner as may be prescribed. 

This comes in the wake of notification of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 in November last year.

Conclusion 

The Insolvency and Bankruptcy Code, 2016 has played  a game-changer in way the rest of world perceives India as a purely commercial destination. In India has jumped several ranks crossed several hurdles to fare well in the global indexes and parameters of "Ease of Doing Business". This is primarily attributable to dynamism and resilience demonstrated by the present regime to 
adapt the arbitration act and insolvency code with the evolving scenario-landscape and changing demands of India's corporate sector.

Of the many reforms the Code,2020 introduces, it inaugurally equips the CD to initiate CIRP against other CDs, the ambit of Section 14, and inserts Section 32A to immune the CD and its new management post the resolution process.
The Code, just like any other fledgling legislation, grappled with divergent views of the Courts,and other stakeholders on its interpretation and implementation.

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 AUTHOR: - Adv. Parvindra Nautiyal

Managing Partner At A Biz Chancellor (Advocate, Company Secretary (Aspirant), B.COM Graduate, First Runner-up winner Moot Court Competition Organised by ICSI Noida Chapter)
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