The Cabinet has approved a promulgation of an ordinance to amend the 16-month-old Insolvency and Bankruptcy Code (IBC).

The present amendment is based on recommendations of a 14-member government appointed committee that had last month suggested a slew of measures, including addressing difficulties of home buyers and making recoveries easier for lenders plus disqualifying certain classes of promoters from back door entry into the resolution process.

Report of the Insolvency Law Committee

On 26th March 2018, the Insolvency Law Committee submitted a report addressing various pressing issues in relation to the Code. One of the key recommendations of this report was to streamline the application of section 29A in order to prohibit only those who have contributed to the defaults and have consequently run the company a ground, or are otherwise undesirable, from participating in the insolvency resolution process.

The recommendations in relation to this section include the deletion of “if such person, or any other person acting jointly or in concert with such person” from the first line of the provision. This aims at preventing the interpretation of the phrase “person acting jointly or in concert” in accordance with the definition provided in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This is a commendable step as such an interpretation was proving to be counter productive owing to the wide range of individuals who stood disqualified from the resolution process due to wide-ranging scope of the definition.

Other positive recommendations include the exclusion of pure play financial entities from the ambit of clause © of section 29A, as the Committee rightly observed that it is highly probable for them to be related to companies that are categorized as non-performing assets (NPA). Another pragmatic suggestion in relation to this clause is the addition of a proviso stating that the section will not apply if the NPA is held solely due to the acquisition of a corporate debtor under the process prescribed by the Code for a period of three years from the date of approval of the previous resolution.

Further, the suggestions to narrow down clause (d), which relates to conviction for offences punishable with imprisonment of two years or more and clause (e), which deals with disqualification to act as director under the Companies Act 2013, are indeed laudable steps towards a more progressive application and implementation of this section. The Committee observed that these two clauses are personal in nature and need not be extended to the related parties of the resolution applicant. Moreover, clause (d) might further be narrowed down by incorporating a schedule of offences to exclude those offences which have absolutely no connection with the ability of an applicant to successfully manage a corporate debtor. Lastly, the ambit of this clause may also be tapered down if the Government agrees to the suggestion that it will not be applicable if an appeal has been preferred against the concerned order within the prescribed statutory period.

Clause (g) of the section also has been constricted in its application. This provides the necessary safeguard for applicants who have acquired corporate debtors, who have previously engaged in a preferential, undervalue, fraudulent or extortionate credit transaction. Furthermore, the Committee has provided for the necessary change in phrasing of clause (f) in order to ensure it is in consonance with the decision of the NCLT.

However, while addressing the issue of compliance with section 29A being too onerous and self-defeating as it prolonged the resolution process indefinitely, the Committee merely stated that applicants would be required to submit an affidavit confirming their eligibility under this provision. Additionally, the committee was of the opinion that the presence of section 30(2)(e) which mandates the resolution plan to be in consonance with the law, would ensure compliance with section 29A. Lastly, it clarified that this section would be prospective in its application to prevent any sort of hindrances in cases, which are already at an advanced stage.

Classification of Debt: Advantage to Home buyers

Home buyers had so far been treated as “unsecured creditors” which means they do not have the first charge on the assets of the bankrupt firm. The President has given his assent to the Ordinance. This proposal classifies home buyers as ‘Financial Creditors’ at par with lenders to help them quickly get refunds from defaulting companies/developers.

Now by amending the provisions and By treating them as financial creditors, they will now move up the priority list of creditors, substantially raising the prospects for clawing back a part of their investment.

Earlier, if a realty firm went bankrupt, the units for which home buyers had paid money would become the property of banks which could auction them without bothering about the dues of the home buyer. The Ordinance creates a favorable situation for home buyers. Home buyers who have been left high and dry by unscrupulous promoters of bankrupt realty companies will enjoy the rights and privileges of financial creditors under the Insolvency and Bankruptcy Code (IBC).

Impact

The invocation of section 29A not only significantly influences the procedure of resolution but also engenders a material economic impact. The procedure has become more complex as the resolution professional or the liquidator is given the additional responsibility to determine the eligibility of the…