28 January 2020

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.