20 August 2019

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.