Cabinet Recognizes Panel Recommendations and Approves Second Ordinance to the Insolvency and Bankruptcy Code, 2016
From placing home buyers on equal footing with financial creditors to allowing promoters of small enterprises to bid for their bankrupt companies, the focus of the changes to the Insolvency and Bankruptcy Code, 2016 (Code) that were approved by the Union Cabinet on May 24th 2018 seem to be an acknowledgment that smaller and larger participants in insolvency proceedings need to be dealt with differently. Recently on 6th June, 2018 the President has approved the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. Here we take a quick look at some of the key changes and their implications.
1. Home-buyers given equal status as that of Financial Creditors:
The preclusion of home-buyer/s from the definition of ‘financial’ or ‘operational’ creditor has been a major point of worry as it completely overlooks the involvement of home-buyers in any part of the insolvency resolution process in the event the promoter company goes into liquidation.
With a view to afford relief to home-buyers, the Panel has recommended as follows:
- That home-buyers be put at par with banks and institutional creditors in terms of priority for recovering dues from bankrupt / insolvent realty firms.
- That amounts raised under a real estate project will qualify as financial debt and accordingly the definition of financial debt be modified.
This recommendation is likely to act as an apt remedy for home-buyers to recover their dues in the event the promoter company goes into liquidation, a situation which is not covered under the Real Estate (Regulation and Development) Act, 2016 (RERA). Under RERA, home-buyers have a remedy of getting their monies refunded in the event the promoter is unable to meet the timelines involved in delivery of possession.
2. MSME Promoters (who are not willful defaulters) can now bid for their companies upon its liquidation:
One of the hallmarks of the IBC is that it does not allow promoters and related parties to bid for their delinquent companies. The logic to that is simple. The government does not want promoters to siphon out all the money from the company, thereby forcing it into liquidation and then buy it back for a significantly lower value. However, while this makes perfect sense for large entities, which are likely to find many third-party buyers, the situation is very different for small and medium businesses, which have run into genuine trouble. Saving them from shutting down is rarely going to be a priority for large companies. But, letting them shut down would have deep ramifications on India’s economy and the job market. Recognizing this special need, the Panel has recommended that apart from willful defaulters, the MSME promoters, who have had their accounts classified as a non-performing assets (NPA), will be able to put up a resolution plan. Such promoters were previously allowed to take part only if they had cleared all their prior dues. This essentially means that now owners of MSMEs can bid for their own companies in the resolution process. This change has been considered after it was found that there were very few takers/bidders for MSMEs and more often than not only their promoters were the only ones interested.
3. Relaxations on minimum threshold limits for voting by Committee of Creditors (CoC):
In order to ensure that the decision-making is seamless during the Insolvency Resolution Process with relation to obtaining approval from the Committee of Creditors for critical decisions and routine day-to-day business decisions, the Panel has recommended the reduction of the threshold from the existing 75% for all decisions requiring approval of the CoC to 66% in case of critical decisions and 51% in case of day to day routine decisions.
This is a progressive step towards bringing the Code in line with the global good practices. The current threshold acts as a barrier to the decision-making process between the Resolution Professional and the CoC and therefore its reduction will only expedite the resolution process.
4. Timeline for obtaining necessary approvals extended:
The Code in its current form does not stipulate any timelines for obtaining the necessary approvals from the Central, State Governments and other authorities for implementation of the resolution plan. Therefore, for obtaining validation for every approval under the resolution plan, NCLT has become a pseudo ‘single window approval’.
The Panel concluded the intent of the Code has been defeated and that the NCLT was never meant to act as a ‘single window approval’. Therefore, the Panel has recommended obtaining preliminary remarks from various concerned authorities as a whole and thereafter submitting the same to the NCLT for its final approval. It has also clarified that the timeline within which these approvals are required to be obtained is one year.
For further queries or clarifications pertaining to the forthcoming amendment to the Insolvency and Bankruptcy Code, please feel free to contact us at firstname.lastname@example.org
- Antara Dasgupta (Senior Manager-Legal Operations)
- Baishali Bhattacharjee (Assistant Manager, Legal Operations)
- Vivek Chattopadhyay (Associate, Legal Operations)
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