[Viraj Virvadia is a student at National Law University, Jodhpur.]
One can say that the decision of Standard Chartered Bank v. Satish Kumar Gupta, also known as the Essar Steel case, is a wake-up call to resolve various lacunae present in the Insolvency and Bankruptcy Code, 2016 (IBC). In the Essar Steel case, the financial creditors were treated at par with the operational creditors. Further, the Committee of Creditors (COC) did not have a say in deciding the manner of distribution amongst the creditors. This raised several questions and the case was also challenged before the Supreme Court of India. Meanwhile, the Government of India placed the Insolvency and Bankruptcy Code (Amendment) Bill 2019 (Bill) before the Rajya Sabha and ultimately got a nod from both the houses. The Bill is the third effective amendment brought to the IBC since its enactment in 2016. The intention of the Bill, as expressed by the Finance Minister, is to remove the prevailing grey areas in the IBC, and to ensure that no interpretations are made which are inimical to the original intent of the law. Here are some of the noteworthy clarifications and changes made to the IBC:
Insolvency resolution process to be completed within a period of 330 days
The Bill mandates the corporate insolvency resolution process (CIRP) to be completed within 330 days from the day of commencement of CIRP. It is pertinent to note that the above-mentioned period includes all extended periods granted as well as the time taken in legal proceedings with respect to the CIRP. Hence, no extended periods will be provided from now on, and if the CIRP exceeds 330 days, it will result in a mandatory liquidation of the corporate debtor. With respect to present proceedings which have exceeded 330 days, the Bill provides that such proceedings are to be completed within a period of 90 days from the date of commencement of the Bill.
Adjudicating Authority to record reasons in writing for any delay occurred in admitting or rejecting the application of financial creditors
The Adjudicating authority must either admit or reject the financial creditor’s application to initiate CIRP within 14 days of the filing of the same. If the Adjudicating authority fails to do so, it has to provide reasons in writing for the same.
This step would further prevent unnecessary delays during the insolvency resolution process. Generally, it is seen that the Adjudicating Authority takes more than 14 days to admit or reject the application for CIRP. However, the proposed amendment will make sure that the prescribed time limit is not exceeded.
A clarification to the definition of resolution plan
An explanation is proposed in the Bill to the definition of a resolution plan provided in Section 5(26) of the IBC. As per the proposed explanation, “a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger”.
Although Regulation 37 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 provides various measures for restructuring of the corporate debtor, this proposed explanation is essential as it will provide statutory recognition to the same. Hence, this will do away with the challenges against the resolution plan which have hitherto been filed by the stakeholders.
Binding nature of the resolution plan applies to governments as well
The Bill clarifies that once a resolution plan has been approved, it will be binding on the Central Government, State Government or any local authority to whom dues are owed. At present, the IBC does not provide such statutory recognition. After the clarification, there will be less scope for frivolous challenges to the resolution plan, once the same is approved by the Adjudicating Authority.
Committee of Creditors (COC) can liquidate the corporate debtor at any time
The Bill seeks to insert an explanation whereby “the COC may take the decision to liquidate the corporate debtor, any time after its constitution and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.” Although it is a clarification, it will put an end to the confusion with respect to timelines for liquidation.
Voting by the authorised representatives
As per the Bill, the authorised representative is to vote on behalf of the financial creditors represented by him in accordance with the decision of more than 50% of financial creditors in terms of their voting share. However, the Bill provides for an exception whereby this clause will not apply to cases dealing with withdrawal of CIRP proceedings.
This proposed change will ease the decision-making process of the creditors, especially in cases where there are a large number of financial creditors. Furthermore, this change will also do away with the problems faced in cases such as IDBI Bank Limited v. JP Infratech Limited (JP Infratech). In the JP Infratech case, there were thousands of homebuyers acting as the financial creditors, which ultimately led to delays because the decision making process was slow.
Distribution under the resolution plan
The Bill proposes that the payment made to the operational creditors under the resolution plan should not be less than the liquidation value of their debt or the amount that would have been received if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priorities in Section 53 of the IBC. Another explanation is added which states that the distribution is to be ‘fair and equitable’ to such creditors.
The Bill further proposes that the payment made to the dissenting financial creditors will not be less than the amount they would receive in the event of a liquidation. It is interesting to note that the concept of payment of liquidation value to dissenting financial creditors, which was held to be ‘ultra-vires’ and struck off in the case of Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Limited and Others, has been brought again vide the Bill. Hence, even those financial creditors who do not vote in favour of the resolution plan will get some payment which is at least equal to the liquidation value.
Another essential feature of the Bill is that the COCs are allowed to consider the manner of distribution of the proceeds. Further, they can consider the order of priority amongst the creditors including the priority based on the value of the security available to a secured creditor.
It is pertinent to note that this clause will apply in the following on-going cases:
where a resolution plan has not been approved or rejected by the Adjudicating Authority;
where an appeal has been preferred; or
where a legal proceeding has been initiated against the decision of the Adjudicating Authority in respect of a resolution plan.
The implementation of the Bill will be exciting as it will significantly change the findings of the Essar Steel case and also fill in the grey areas highlighted therein. The power of the COC to consider the manner of distribution has been brought back after the questionable Essar steel judgement. However, it would be beneficial if some further explanation were provided to the term ‘fair and equitable’ distribution so as to avoid any conflicts or interpretations which are against the intention of the IBC.
The Bill seeks to complete the CIRP proceeding within 330 days. However, this period ends when the COC has approved a resolution plan and submitted it to the Adjudicatory Authority for its approval. The said period is narrow as it does not include the appeals and litigation which arise once the plan is accepted by the Adjudicatory Authority. A recent example would be the Essar Steel case where the resolution plan had been accepted by the Adjudicating Authority but was challenged by the lenders before the Supreme Court of India. The case has completed approximately 730 days and is yet under litigation. In essence, such delays should be looked into as well. The effectiveness of this amendment can be measured by seeing how the Essar Steel case is dealt with. Also, it is interesting to note that there are 335 cases pending which have crossed the above-mentioned threshold of 330 days. Such cases have been given a period of 90 days to complete the CIRP proceedings.
It is a commendable effort on part of the Central Government to have a quick approach to resolve the issues in the IBC. The amendment is definitely a way forward for India, but there are some other grey areas which need to be resolved, one of them being cross border insolvency. No steps have been taken to provide for a cross-border insolvency framework in the country, despite recommendations in this regard having been made by the Insolvency Law Committee in its report in October 2018.