Overview of The Insolvency and Bankruptcy (Amendment) Act, 2020

Overview of the Insolvency and Bankruptcy (Amendment) Act, 2020

The Central Government, on 13 March 2020 while repealing The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 has notified 14 amendments to the Insolvency & Bankruptcy Code, 2016 (Code) vide Insolvency and Bankruptcy (Amendment) Act, 2020 (Amendment Act).

Homebuyers left in a lurch again:

The crucial amendment being the insertion of the proviso to Section 7 of the Code, which provides that in the case of allotees under a real estate project (hereinafter referred to as ‘Homebuyers’ for ease in reference), the application shall be jointly filed by not less than 100 of such creditors in the same class or not less than 10% of such class of creditors of the same class. The purpose behind such insertion would be to avoid multiple applications being filed by various homebuyers, separately, dragging the promoters/ builders of construction projects to National Company Law Tribunal one after the other. Homebuyers were sheltered under this Section against the defaulting promoters/ builders. The sheer number of homebuyers in a given housing project would have acted as a spoke in the wheel of due completion of the project, especially in the cases where the homebuyers would individually/ separately initiate Corporate Insolvency Resolution Process (CIRP) against a builders/ promotes one after the other. While the intention behind the proviso is to strike a balance between protecting the homebuyers and preventing multiplicity of proceedings against the builder/ promoter, it appears that the proviso leans more towards aid of the builder/ promoter than the homebuyers.

The retrospective effect of this proviso to the section worsens the situation of homebuyers constraining them to modify their application filed in the National Company Law Tribunal (which have not been admitted yet) within 30 days from the commencement of this Act failing which the application would be deemed to be withdrawn.

Immunity to the new management against past offences:

Conditional immunity is granted to the new management (pursuant to the acceptance of resolution plan by the Adjudicating Authority) by way of Section 32A against offences committed prior to or during CIRP by former management/ promoter(s) of the Corporate Debtor. This Section protects the new management from the liability of the Corporate Debtor for any offence committed prior to CIRP, however, such an immunity comes into play only when the management and control of the Corporate Debtor is radically changed to a point where the new management or for the matter of fact, a resolution applicant shouldn’t have been a related party or a promoter or in management or control of Corporate Debtor prior to the acceptance of the resolution plan. The aforesaid immunity would be lifted, in the case where the investigating authority has a reason to believe that the person had abetted or conspired for the commission of the offence and a report or a compliant has been filed to that effect.

Alike protection subject to the dual conditions is extended to the property too (covered under the resolution plan) of Corporate Debtor against attachment, seizure, confiscation etc. in relation to an offence committed prior to the commencement of CIRP.

Appointment of IRP on the Insolvency Commencement Date:

The ‘insolvency commencement date’ as per Section 5(12) of the Code, is the date of admission of CIRP against the Corporate Debtor and in the case where an IRP is not appointed in the order of admission, the date on which the IRP is appointed by the Adjudicating Authority would be the ‘insolvency commencement date’. The Amendment Act has deleted the proviso, hence restricting the ‘insolvency commencement date’ to the date of admission of CIRP. In effect, the Adjudicating Authority will have to strictly appoint an IRP while passing the order of admission of application/ commencement of CIRP. A consequential addition of the words ‘on the insolvency commencement date’ in Section 16 governing the appointment of IRP by the Adjudicating Authority furthers the point that 14 days period granted to appoint an interim resolution professional from the date of passing an order or admission of CIRP has been done away with, constraining the Adjudicating Authority to appoint an IRP on the date of commencement of CIRP. The intention behind such deletion of the proviso, could possibly be, to restrict the scope of passage of time in between the order of commencement of CIRP and appointment of IRP.

Non-suspension/ non-termination of supply of critical goods and services during moratorium:

Section 14(2) of the Code provides that essential goods and services to the Corporate Debtor are not be suspended or terminated during the moratorium period. By inserting sub-section 2A to Section 14, the Government has taken adequate measures to ensure that the supply of goods or services that are critical to protect/ preserve the value of the Corporate Debtor as a going concern are not suspended or terminated, and in that case, interrupted. In effect, power is given to the Interim Resolution Professional or a Resolution Professional to consider, negotiate and implement contracts with vendors who provide critical goods and services to the Corporate Debtor ensuring that operations of the Corporate Debtor are ably managed as a going concern during the moratorium period under Section 14.

A consequential insertion made in Section 240 of the Code, enabling the Board to make specific regulations for circumstance in which supply of critical goods or services may be terminated, suspended or interrupted during the moratorium period. This way, while on one hand the Board has ensured that the value of the Corporate Debtor is protected, on the other hand, specific regulations to suspend or terminate the supply of critical goods and services squarely covers a situation where unfair demands could be made by vendors considering the high risk involved in supplying to a Corporate Debtor. The word critical goods or services though not specifically defined under the Code, should be given a wider meaning as opposed to the meaning given to ‘essential goods and services’ by the Board under Regulation 32 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Other amendments notified by the Amendment Act are:

‘Interim Finance’ is a financial debt (along with interest) raised by an IRP to finance the cost of CIRP. Addition of the words ‘and such other debt as may be notified’ to the definition of ‘interim finance’ to be raised by IRP widens the definition leaving a window with the IRP to raise debts other than financial debts defined under Section 5(8) of the Code. [Section 5(15) of the Code]

Insertion of Explanation II to Section 11 clarifies that a corporate debtor is allowed to initiate CIRP against any other corporate debtor.

Insertion of Explanation to Section 14 governing the moratorium on the Corporate Debtor, clarifies that any license, permit, concession etc. granted by Government, local authority or sectoral regulator to the Corporate Debtor shall not be suspended or terminated on the grounds of insolvency, subject to the payment of current dues.

Section 23(1) of the Code provides for the Resolution Professional to conduct the CIRP and manage the operations of the Corporate Debtor during the CIRP. The addition of proviso to Section 23(1) extends the role of the Resolution Professional to manage the operations of the Corporate Debtor till the resolution plan is submitted or in cases of liquidation, an order appointing a liquidator is passed.

Explanation provided under section 227 of the Code, it is clarified that insolvency and liquidation proceedings of financial service providers may be conducted with suitable modifications to the Code.