6 December 2017

 AMENDMENTS TO INSOLVENCY AND BANKRUPTCY CODE

The Insolvency and Bankruptcy Code, 2016 (IBC) is a law for the revival and restructuring of companies, firms and individuals in financial difficulty and providing for an insolvency resolution process in a time bound manner for maximisation of the value of assets of such persons.

In order to protect the interests of the stakeholders involved, and further strengthen the insolvency resolution process, the President of India promulgated an Ordinance to amend the IBC on 23 November 2017 (Ordinance) which inter alia disqualifies certain persons from being resolution applicants. At present, the insolvency resolution process involves submission of a resolution plan by a resolution applicant, to a resolution professional for its approval followed by placing the resolution plan before the committee of creditors for their approval, pursuant to which the same is submitted to the adjudicating authority for its approval.

The changes brought about by the Ordinance are as follows:

• Invitation by Resolution Professional: The resolution professional shall now be required to invite prospective resolution applicants to submit a resolution plan, who fulfil criteria laid down by it, with regard to the complexity and scale of operations of the corporate debtor after approval of the committee of creditors. Earlier, there was no such requirement of an invitation by a resolution professional;

• Resolution Applicant: The definition of resolution applicant has been amended to comprise a person who submits a resolution plan pursuant to the invitation made to it by the resolution professional. Earlier, the definition of resolution professional provided that such person was anyone who submitted a resolution plan;

• Eligibility of a person to be a Resolution Applicant: The Ordinance now lays down the disqualification criteria for a resolution applicant. A person, or any person who is acting jointly with such person, or a person who is a promoter or is in the management or control of such person, shall not be eligible to submit a resolution plan if: (i) he is an undischarged insolvent; (ii) he is identified as a wilful defaulter by the Reserve Bank of India; (iii) his account has been identified as a non-performing asset for more than one year; (iv) he has been convicted of an offence punishable with two or more years of imprisonment; (v) he has been disqualified as a director under the Companies Act, 2013; (vi) he has been prohibited from trading in securities by Securities and Exchange Board of India; (vii) he has indulged in undervalued or fraudulent transactions in respect of which an order has been made by an adjudicating authority under IBC; (viii) he has executed an enforceable guarantee in favour of a creditor, in respect of a debtor under insolvency resolution process or liquidation; (ix) is subject to any of the above disabilities under any law in a jurisdiction outside India; (x) he is a promoter or in the management or control of the resolution applicant or corporate debtor during the implementation of the resolution plan, or associate, holding or subsidiary company of such person mentioned above;

• Feasibility: The committee of creditors shall approve a resolution plan after considering its feasibility and viability as per the new Ordinance.

• Liquidation: Under the Ordinance, the liquidator shall not be permitted to sell movable or immovable property of the corporate debtor to any person who is not eligible to be a resolution applicant.

• Penalty: The Ordinance prescribes a penalty of Rs One Lac which may extend to Rs 2 Crore for contravention of the provisions of the IBC.

MHCO COMMENT:

The Ordinance, though passed with the intent to toughen the entire process of insolvency resolution, by attempting to eliminate any persons who, on account of their antecedents, may default and disrupt the entire resolution process, has in fact narrowed the list of persons eligible to be resolution applicants. This could prevent the resolution professional from getting the most value-driven offers as part of the resolution plan since the persons who stand to lose the most from the insolvency resolution process, viz. the promoters of the corporate debtor, could be disqualified. That said, such promoters should not benefit from their own misdeeds. The impact of this Ordinance, therefore, is key to determining whether it has struck a balance between disqualifying unscrupulous promoters and unfairly penalising those who have been affected by business realities.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.