UPDATE | INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2019

On 6 August 2019 the Government promulgated the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (Act) which seeks to make further changes to the Insolvency and Bankruptcy Code, 2016 (IBC). The most significant changes relate to extending the deadline for the completion of the insolvency resolution process and giving the Committee of Creditors greater say in the distribution of funds pursuant to a resolution plan. This amendment stems from the decision of the National Company Law Appellate Tribunal (NCLAT) in the Essar Steel case. This update summarises some of the changes in the Act.

Some of the proposed amendments are:

• Resolution Plan: The Act clarifies that mergers, demergers and amalgamations can form part of the resolution plan. While there was no bar on resolution plans including such provisions, the amendment explicitly makes such inclusions possible.
• Extended Deadline: The Corporate Insolvency Resolution Process (CIRP) presently has to be completed within a maximum of 270 days, failing which the corporate debtor is sent to liquidation. There was some confusion on whether this period was mandatory or directory and the impact of time spent on litigation on this timeline. The Act provides that the CIRP must mandatorily be completed within 330 days including time spent on litigation and the judicial process.
• Operational Creditors and the Power of Committee of Creditors: The NCLAT in the Essar Steel case had held that operational creditors must be treated in a fair and equitable manner when the proceeds of a resolution plan are distributed. NCLAT also held that the Committee of Creditors cannot determine the distribution of proceeds of a resolution plan which must be done by the resolution applicant. The Act reiterates that operational creditors must be treated in a fair and equitable manner. The Act further postulates that the manner of payment of debts of operational creditors would be determined by the Insolvency and Bankruptcy Board of India which shall not be less than the higher of the liquidation value of the company and the amount that the operational creditors would be entitled to if the company was liquidated and amounts paid to the various stakeholders in accordance with Section 53(1) of the Code. The Act now expressly empowers the Committee of Creditors to determine the distribution of proceeds of a resolution plan based on the principles enshrined in the Code.
• Voting by Authorised Representatives: The Act provides that authorised representatives of financial creditors on the Committee of Creditors must vote in accordance with the decision of 50% of the financial creditors represented by the authorised representative. Prior to the amendment, the authorised representative was required to vote based on the decision of each financial creditor represented by him.
• Makes Resolution Plan Binding: The Act further amended Section 31(1) of the Code clarifying that the resolution plan once approved by the National Company Law Tribunal would be binding on all the stakeholders including the Central Government, any State Government or local authority to whom a debt in respect of the payment of dues may be owed.
• Liquidation: The Act further adds clarity to Section 33(2) of the Code stating that the Committee of Creditors may with a 66% vote take a decision to liquidate the Corporate Debtor, any time after constitution of the Committee of Creditors and before preparation of the Information Memorandum.

MHCO Comment: The promulgation of the Act clearly indicates that the Code is a work in progress. The Government seems keen to ensure that the Code continues to be widely used to resolve the problems faced by struggling corporates. NCLAT decision in the Essar Steel case was seen by many commentators as a backward step, which the Act seeks to rectify. However, considering that NCLT has taken substantial time to admit the application, it is not clear on how these proceedings can be concluded within a period of 330 days as proposed in the Act.

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.

LEGAL UPDATE | THE COMPANIES (AMENDMENT) ACT, 2019

On 31 July 2019, the Government promulgated the Companies (Amendment) Act, 2019 (Amendment) to amend the Companies Act, 2013 (Act). A significant portion of the Amendment rationalises the penalty provisions in the Act by reducing the quantum of penalty and substituting imprisonment of officers in default by a fine. That said, there are other significant amendments which are summarised in this update.

• Declaration by new companies: A company incorporated after the commencement of the Amendment and having a share capital cannot commence business or borrow funds unless (a) a declaration is filed by a director within a period of 180 days from the date of incorporation of the company in the prescribed form with the Registrar that every subscriber to the memorandum of the company has paid the value of the shares agreed to be taken by him on the date of making such declaration; (b) the company has filed with the Registrar a verification of its registered office as set out in Section 12 (2) of the Act. If the declaration is not filed within the prescribed period and the Registrar is of the view that the company is not carrying on any business, the Registrar can initiate action for removal of the name of the company from the register of companies.
• Dematerialisation of Shares: The Central Government may prescribe that shares of a private company can only be issued or transferred in dematerialised form.
• Period for registration of charges: After the commencement of the Amendment, the period of extension for registration of charges has been reduced to 60 days with a further extension of 60 days possible on payment of additional fees.
• Corporate Social Responsibility (CSR): The most significant changes brought about by the Amendment are the changes to the provisions on CSR. These provisions now apply to companies that have been carrying on business for less than 3 financial years. If a company fails to spend the prescribed amount in discharging its CSR, the consequence is no longer giving reasons for the same. Comply or explain approach has been done away with by the Amendment.
  
  The company is now required to transfer the unspent amount to a Fund specified in Schedule VII of the Act within a period of 6 months of the expiry of the financial year. If the ongoing project for which the funds have been allocated meets certain prescribed conditions, the company is required to transfer the unspent amount within a period of 30 days from the end of the financial year to a special account opened by the company with a scheduled bank to be called the Unspent CSR Account and such amount shall be spent by the company towards its CSR Policy within a period of 3 financial years from the date of such transfer failing which the company shall transfer the unspent amount to a Fund specified in Schedule VII of the Act within a period of 30 days from the date of completion of the third financial year.
  
  The Amendment now penalises the failure of a company to comply with the provisions dealing with CSR by imposing a fine of not less than INR 50,000 but which may extend to INR 25 lakhs on the company and providing for imprisonment of every officer of the company who is in default for a term which may extend to 3 years or with a fine as prescribed for the company or with both. Finally, the Central Government is empowered to issue directions to companies on CSR which must be complied with by such companies.
• Additional Disqualification of a Director: An additional disqualification of a director has been added whereby a director is disqualified if he fails to comply with the provisions of Section 165 of the Act on the maximum number of directorships that may be held by a person.
• Additional powers to Central Government: The Central Government has been given certain additional powers under Section 241 of the Act dealing with oppression and mismanagement. Where in the opinion of the Central Government there exist circumstances suggesting that (a) any person concerned in the conduct and management of the affairs of a company is or has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law or of breach of trust; (b) the business of the company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; (c) a company is or has been conducted and managed by such person in a manner which is likely to cause or has caused serious injury or damage to the interest of the trade, industry or business to which such company pertains; or (d) the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest, the Central Government may initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

MHCO Comment: The most significant amendments of the Amendment are the changes to the provisions on CSR and the powers given to the Central Government to initiate an inquiry into the conduct of directors and key managerial personnel of companies.

• The provisions on CSR are now mandatory with penal consequences for non-compliance. In making these changes, the Government has moved away from the “comply or explain” approach. In a liberalised capitalist society that India now is these changes are difficult to understand. It is the responsibility of the Government to address social inequity. This responsibility cannot be transferred to the private sector. If the Government is concerned on distribution of wealth, it could impose an additional tax on hugely profitable companies and use the income to address social issues. The changes introduced by the Amendment are akin to such a tax with the responsibility of achieving social change now imposed on the private sector. This is a wholly undesirable result. In the event if this Amendments are gazetted and notified, it is hoped these provisions will be challenged in the courts of law to ensure that the private sector is allowed to operate for overall economic development without being dragged into effecting social change which is the responsibility of the Government.

• The powers given to the Central Government on initiating an inquiry into whether directors or key managerial personnel are fit and proper persons to manage a company seem justified given the number of cases of mismanagement in the corporate sector headlined by the IL&FS case. The Central Government can now initiate action before a crisis snowballs to prevent any fallout of mismanagement and diversion of funds.  

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.comfor any assistance.

LEGAL UPDATE | RBI RELAXES END-USE RESTRICTIONS IN ECB POLICY

 The Reserve Bank of India (RBI) on 30 July 2019 issued a circular rationalising the end-use restrictions in the External Commercial Borrowings (ECB) Policy. This move is expected to make capital available to corporates from the offshore market at cheaper rates than the onshore market. This update briefly summarises the changes made by the RBI Circular.

Eligible borrowers are now permitted to raise ECBs from recognised lenders, except foreign branches / overseas subsidiaries of Indian banks, for the following purposes:

·                     ECBs with a minimum average maturity of 10 (ten) years are permitted to be raised for working capital purposes and general corporate purposes. Non-Banking Financial Companies (NBFCs) are also allowed to borrow subject to the same maturity requirement for on-lending.

·                     ECBs with a minimum average maturity of 7 (seven) years can be availed for repayment of rupee loans borrowed in the domestic market for capital expenditure. NBFCs are also allowed to avail such loans for on-lending for the same purpose. For repayment of rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same purpose, the minimum average maturity of the ECB is required to be 10 (ten) years.

·                     Eligible corporate borrowers may avail ECB for repayment of rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if classified as SMA-2 or NPA under any one time settlement with the lenders. Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders provided the resultant ECB complies with all-in cost, minimum average maturity and other relevant norms of the ECB framework.

MHCO Comment: This move by the RBI brings much needed relief to corporates who are struggling to raise finance as banks tighten liquidity and NBFCs find credit hard to come by. Now corporates can raise capital from overseas markets for working capital requirements and general corporate purposes. Refinancing of rupee loans at cheaper rates from overseas markets has also been made possible. The most significant change is the permission granted to corporates to avail distress financing and for eligible banks to assign sub-standard loans to foreign lenders. This would certainly help improve the balance sheet of banks and bring relief to corporates who are under stress.

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.comfor any assistance.