IBC Update | Ordinance 2019

The President of India recently promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (Ordinance). The key objective of this Ordinance is to (a) provide immunity to the corporate debtor against prosecution in relation offences committed prior to the commencement of corporate insolvency resolution process (CIRP) (b) Prevent action against the property of the corporate debtor; (c) Fill in the critical gaps in the corporate insolvency framework. This update seeks to broadly set out the important changes brought about by the Ordinance, to the Insolvency and Bankruptcy Code, 2016 (IBC).

• Insolvency Commencement Date and appointment of Interim Resolution Professional (IRP): Proviso to Section 5(12) of IBC is now omitted. Accordingly, the insolvency commencement date would now mean the date of admission of the application for initiating CIRP. Further, it is mandatory for the adjudicating authority to appoint an IRP on the insolvency commencement date i.e. date on which the application for initiating CIRP is admitted.
  
  
• New Minimum Requirement qua certain Financial Creditors: Financial creditors in respect of securities and deposits under a debt instrument which provides for an appointment of trustee or an agent to act as an authorised representative or when debit is owed to a class of creditors, as provided in Section 21(6A)(a) and (b) of IBC respectively, can now only initiate insolvency proceedings under Section 7 of IBC when such application is filed jointly by not less than 100 of such creditors or not less than 10% of the total number of creditors in the same class, whichever is less.
  
  
• New Minimum Requirement qua flat buyers: In case of allottees under a real estate project, an application to initiate CIRP can only be filed jointly by not less than one hundred of such allottees under the same project, or not less than 10% of the total number allottees under the same real estate project, whichever is less.
  
  
• No suspension of license, permit, registration etc: Section 14 of IBC, which deals with moratorium, has been amended to provide that a licence, permit, registration or a similar grant or right given by the Central or State Government or any local authority shall not be suspended or terminated only on the ground of CIRP having been instituted against the corporate debtor. Further Section 2A has been added to Section 14 of IBC to provide that supply of goods or services, essential for continuing the corporate debtor as a going concern, shall not be terminated merely because insolvency process has been initiated, provided the corporate debtor is making payment for such supplies.
  
  
• RP to continue until liquidator is appointed: Resolution Professional (“RP”) shall continue to manage the operations of the corporate debtor until an order appointing a liquidator is passed under Section 34 of IBC.
  
  
• Immunity to the corporate debtor for offences committed prior to CIRP: The Ordinance provides that the liability of the corporate debtor, with respect to an offence committed prior to the commencement of the CIRP, shall cease from the date of approval of the resolution plan. It also provides that if prosecution has been initiated during CIRP, corporate debtor shall stand discharged from the date of approval of the resolution plan. Further, it provides immunity to the property of the corporate debtor from any attachment, seizure, retention or confiscation in relation to any offence committed prior to the commencement of CIRP, if such property is covered under the resolution plan approved by the authority. However, it is important to note that the benefit under this section is available only if the resolution plan results in change in the management or control of the corporate debtor.

MHCO Comment: By granting immunity to the corporate debtor from the wrongdoings of the earlier management, the ordinance aims at boosting the participation of the potential bidders in the insolvency process and ensuring a smooth CIRP. The government seems to have taken a note of the remedies available to the allottees of a real estate project against the developer under RERA and thus provided a minimum threshold for instituting of CIRP.

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.

IBC UPDATE | NCLT ALLOWED SUCCESSFUL RESOLUTION APPLICANT TO HANDOVER THE POSSESSION OF THE UNDERTAKING BACK TO COC

In one of the unique cases, National Company Law Tribunal, Mumbai (NCLT) recently passed an order in Mandhana Industries Limited (MIL) – Insolvency Case allowing the successful resolution applicant to handover the control and possession of the company back to the committee of creditors (COC).

Background

Pursuant to an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), NCLT had allowed the resolution plan and Formation Textiles LLC (Resolution Applicant) was held as a successful resolution applicant. The admitted claim by the Resolution Professional (RP) was of Rs. 1,183 Crores approximately. However, the said resolution plan was later challenged before the NCLT subsequently on following issues:

• First application was filed by the Resolution Applicant on the ground that it had not been provided with the entire information as is necessary for complying with its terms and obligations under the resolution plan;
  
  
• Second application was filed by RP for claiming the Corporate Insolvency Resolution Process (CIRP) costs; and
  
  
• Last application was filed by Bank of Baroda, on behalf of the Consortium, seeking inter alia the possession of the undertaking, which is to be then handed over to a third party, to ensure proper maintenance and that the value of the asset is not depleted.
  

Arguments before NCLT

In the first application filed by the Resolution Applicant, it has been contended that the forensic audit report of the undertaking was not shared with it by the RP. Thus, it had not been provided with essential information which was disclosed in the Report, such as information with regard to the trading business of MIL, which was suspected to be based on sham and bogus sales. Further, it was contended that several financial figures reported were bogus and false.

It was argued that the Applicant’s bid and the resolution plan were based on misrepresentation and concealment of material and relevant facts. Thus, the Resolution Applicant had sought an order quashing and setting aside the Resolution Plan. It was also submitted that the Applicant was willing to handover the possession of the undertaking, without prejudice to its rights and contentions.

During hearings of the applications, the RP and Consortium of Banks suggested that the Resolution Applicant handover the possession of the undertaking in view of its application challenging the Resolution Plan itself. Further, it was contended on behalf of the consortium of Banks that the unit has been handed over to the Successful Applicant on an ‘as is where is’ basis and the said Applicant had defaulted in making the payments as per the resolution plan.

NCLT View:

On the basis of these arguments made on behalf of all the concerned parties, NCLT held that it would be necessary to hear all the applications separately and decide each on its merits, but in the meanwhile, NCLT agreed to give interim relief to the parties. Pending the final disposal and after perusing the material on record, it proceeded to order that the possession of the undertaking be handed over by the Resolution Applicant to the COC, who in turn would hand it over to the erstwhile RP. The erstwhile RP is to continue in the same position and be vested with the rights and duties as provided under Section 14 of the IBC.

Further, such handover would be subsequent to an independent agency / person taking the inventory and examining the status and working condition of the machines of the undertaking. 

MHCO Comment: This is an interesting development under IBC. From this judgment, we can infer that upon any material misrepresentation, a successful resolution applicant could be entitled to terminate the Resolution Plan on approaching the NCLT.

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.