Analysis of Insolvency and Bankruptcy (Amendment) Ordinance, 2019

Introduction:

The Union Cabinet on 28^th December 2019 promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2019. The idea carrying the enactment of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as code) is maximization of value assets by ensuring a time-bound insolvency proceeding and further protection of the value of the debtor. The promulgation of the ordinance has emerged as a device to fulfill the objectives of the code by streamlining the process of Corporate Insolvency Resolution Process (hereinafter referred to as CIRP). This piece will analyze some of the key changes made in the code by the promulgation of this ordinance.

Priority to Last Mile Funding to speed-up the resolution process

The amendment has now widened the ambit of interim finance defined under Section 5(15) of the code. The interim finance initially was restricted to financial debt but the amendment has now included every other kind of debts namely, operational debts. This change has made it possible for the creditors other than the one extending financial debt to enjoy priority in repayment. Priority to last-mile funding, a colloquial term for interim finance will be speed-up the resolution process.

Threshold to initiate Insolvency Proceedings

The Insolvency and Bankruptcy (Amendment) Ordinance, 2018 delegated the status of financial creditors to the Home-buyers. This change empowered them to initiate CIRP against the real-estate developers delaying the ongoing building projects.

However, it was later observed that these home-buyers started misusing the powers delegated to them, by initiating CIRP against the property developers on an individual basis causing a delay in the construction of ongoing projects. These frivolous proceedings caused huge loss to the real-estate developers. In order to remove such anomalies and to attenuate the risk, the ordinance has inserted a provision under Section 7 of the code prescribing a minimum threshold for a certain class of financial creditors to initiate the process of CIRP.

Now in case of creditors belonging to the same class, application for the initiation of CIRP shall be filed by not less than 100 creditors or 10% of creditors of such class whichever is less. It can be thus concluded that change is significant in mitigating the loss faced by the real-estate developers caused due to the stalling of the on-going construction projects due to the initiation of such flippant proceedings. However, it may be possible that these real-estate developers try to desert the home-buyers so that they do not touch the prescribed threshold to initiate an application for insolvency process.

Moratorium on termination of benefits to Corporate Debtors subject to a condition

The amendment has extended the scope of the moratorium imposed under Section 14 of the code. This new amendment has made it clear that no license, permit, registration, quota, concession, clearances or similar grants given by either Central, State or local authority would be suspended on the ground of insolvency subject to the condition that there is no default with regards to the current payment dues arising out of such grants or benefits.

Further, the ordinance has also introduced Section 14(2A), which prevents the termination of such essential goods which are essential for the going concern of the Corporate debtor. The primary purpose of this amendment is to ensure greater ease of doing business by not depriving the corporate debtor of any profitable contracts or benefits during the insolvency proceedings.

Drawing out restrictions to initiate insolvency proceeding

Section 11 code, initially did not provide clarification as to whether Corporate debtors can file an insolvency application against another corporate debtor to recover their dues. Though it was not restricted for a Corporate Debtor to initiate insolvency proceedings, it was subject to certain conditions. This made it difficult for the Corporate debtor to repay the debts to the creditors during the insolvency proceedings because it had limited assets. In pursuance of the goal to maximize the value assets of the corporate debtor, the amendment has sought to make it possible for the Corporate Debtors to initiate Insolvency resolution against other Corporate debtors.

Further, it seems a fair amendment, as it provides the Corporate debtor an opportunity to save them from liquidation and also to revive and reorganize his business by recovering the dues from the ones who are indebted to him.

Safeguarding the Debtor from offences committed prior to the insolvency proceedings subject to conditions

The insertion of Section 32(A) under the code has served the primary purpose of the resolution of a distressed asset which will provide a clean slate to the potential investor in order to encourage the procurement of such assets. This new section has safeguarded the Corporate debtor from the offences committed prior to the insolvency proceedings and also provides immunity to the debtor from the attachment or liquidation.

Subject to the Condition that the person seeking immunity is not a part of the management of corporate debtor involve in the committing of offence. This ring fencing of the Corporate debtor from prosecution for any offences committed prior to the insolvency process has now made it smoother for the potential investors to acquire or purchase the distressed assets. Approval by NCLAT to JSW Steel to procure bankrupt Bhusan power is one such recent case after the insertion of Section 32(a) to the code.

Conclusion

The changes brought in by the ordinance has ensured to address the issues of some distressed companies. Priority to last mile funding will enhance the resolution process. Addition of a threshold to initiate insolvency proceedings has given the real-estate developers the much-needed protection against the losses faced by them due to obstruction in the construction work. Moratorium on termination of benefits provides Corporate debtors an opportunity to have benefits of profitable contracts even during the period of insolvency proceedings. Withdrawing of restriction to initiate insolvency proceedings against the one indebted to him saves Corporate debtors from liquidation and further to revive their business. Lastly, safeguarding the new management of Corporate debtor from prosecution will help in attracting more potential bidders to encourage investments in distressed assets.