Posts

TRANSITION OF LAWS FROM SICA TO IBC

/in , , /by

TRANSITION OF LAWS FROM SICA TO IBC

Introduction

The name Sick Industrial Companies Act itself connotes the reason for its existence. In the 1980s, India saw a wave of widespread industrial sickness, prompting the government to pass important legislation to address the problem. The SICA was adopted in 1985 with the goal of ensuring the timely detection of sick and potentially sick firms that own industrial undertakings, as well as the quick assessment by a panel of experts of the preventative, corrective, and other measures that must be done in their case. This was an action to free up investment in such industrial facilities that had been locked up and put to better use.

The Insolvency and Bankruptcy Code of 2016 is a legislation that consolidates and modifies the legislation governing reorganisation and insolvency resolution of Corporate Persons, Partnership Firms, Limited Liability Partnership and Individuals in a time-bound manner, for the purpose of maximising the value of such persons’ assets, promoting entrepreneurship, increasing credit availability, and balancing the interests of all stakeholders, including changing the order of priority of payment of Government dues, and establishing an insolvency and Bankruptcy Board of India, and for matters connected with or incidental thereto. Transition from SICA to IBC - Historical Analysis - iPleaders

PROBLEMS WITH SICA

The SICA’s main limitation was that it only applied to sick industrial enterprises, excluding enterprises engaged in trading, service, or other operations. However, the whole experience was unsatisfactory due to a number of variables, including SICA’s inapplicability to non-industrial and small/ancillary businesses. The Sick Industrial Companies (Special Provisions) Act was abolished and replaced by the Sick Industrial Companies (Special Provisions) Act of 2003, which diluted some of SICA’s provisions and filled in some loopholes. One of the most significant modifications in the new law was that it attempted to decrease the growing prevalence of occupational disorders by guaranteeing that firms do not utilise a medical certificate to avoid legal duties. The other reasons why SICA fell short are:

  1. The scope of SICA was defined by the terms “sickness” and “industrial nature.” Since the passage of SICA, there has been a discussion about the meaning and breadth of the term “sick industries” and what happens if a business that has been referred to BIFR and is currently under moratorium loses its industrial nature. Even after the Code’s enactment and repeal, the question remained unsolved.
  2. Only the Board of Directors, the Central Government, the RBI, state-level agencies, or scheduled banks might recommend a company to SICA. If a creditor is not a scheduled bank or just a vendor with a large quantity of past due payments, he or she cannot file for insolvency.
  3. The SICA did not set any deadlines for the BIFR to complete its investigation and issue an order requiring an operating agency to prepare a rehabilitation plan. Only once such an order was passed were deadlines set.
  • There was inadequate oversight of companies who exploited SICA to implement a moratorium and dodge lenders and the Board of Directors could utilise it for its own purposes. SICA gives the company an advantage over lenders because other lenders will be unable to pursue the company if it is referred to BIFR.
  • It was up to the discretion of the BIFR to appoint an operating agency for the sick industrial company referred to it, only in suitable cases. As a result, the SICA system was not standardised, and it did not guarantee that a company’s rehabilitation would be carried out in a prescribed manner.

Development of IBC

The Code is significantly influenced by other jurisdictions and was written to address the numerous flaws that existed in previous processes for corporate reconstruction and rehabilitation. The code in comparison is much simpler and effective as it involves an integrated “Corporate insolvency resolution process”. Upon default, any financial creditor, operational creditor, or the corporate debtor itself may file an application with the National Company Law Tribunal [“NCLT”) to begin the insolvency resolution process. The NCLT may accept the application if the existence of a default and non-payment of dues by the defaulter is established. The following elements of the Code make it a successful instrument for a company’s rehabilitation:

  1. Lenders participate actively in the decision-making process as members of a “committee of creditors.” Lenders also have the authority to determine which investment plans are acceptable. Under the SICA, the BIFR was in charge of receiving and deciding on creditors’ comments and objections. With the involvement of lenders, such commercial decisions become easier, and all stakeholders have a clear stake in the company’s recovery.
  2. The activities and routine business are continued and handled by the resolution professional with prior consent from the committee of creditors, despite the moratorium prohibiting any action by creditors or anyone against the defaulting company. As a result, the company is preserved as a going concern.
  3. For all parties involved in insolvency procedures, the Code has established distinct levels of accountability and responsibility. As a result, the creditors’ committee is responsible for the resolution professional’s activities and vice versa. In addition, the resolution professional must provide regular progress reports to the NCLTs to keep them informed of the insolvency’s progress.
  4. From the beginning to the finish of the procedure, timelines have been established. The entire insolvency resolution procedure is limited to 180 days; however it can be extended to 270 days if necessary thus making it a strictly time bound process.

Conclusion

Any corporate body, whether through service or sale agreements, loans from banks and financial institutions, judgments, or even interactions with the government, incurs a variety of obligations while operating. A corporate entity’s debt load can sometimes become so high that it endangers its continued existence and operation, while creditors risk losing their whole investment. It should be emphasised that a business’s liquidation or wind-up, as an alternative to insolvency procedures, would result in a complete wrap-up of the firm in such a way that it would no longer exist. When compared to insolvency processes, wind-up processes cause the economy to suffer a bigger loss. Therefore, The Code has revolutionized the process of insolvency resolution in India. IBC is, without a doubt, a comprehensive law with a swift and precise mechanism for dealing with insolvency issues. The time-bound aspect of IBC is a win-win situation since the Companies’ resources are deployed in the appropriate place at the appropriate time, whether it’s by paying creditors or winding up. The company does not continue to lose money indefinitely, inflicting a setback to the economy as whole and impacting individual debtors. Thus, the Code has established a new and improved framework for corporate insolvency resolution, which is far superior to the SICA regime.

Author: Aaditya Sharma

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

INTERFACE BETWEEN ADMIRALTY LAW AND IBC

/in /by

INTERFACE BETWEEN ADMIRALTY LAW AND IBC 

INTRODUCTION

Admiralty Law regulates shipping, navigation, commerce, towage, recreational boating, and piracy by private entities on domestic and international waters. It covers both natural and man-made navigable waters, such as rivers and canals. 

In rem admiralty proceedings and the insolvency of a ship owner is fraught with tension. The advantage of arresting a ship, which elevates a maritime claimant to the status of a secured creditor, sits uncomfortably with principles of insolvency law, which do not contemplate an action in rem and the peculiar consequences that follow from it. Admiralty law is already universal; it applies to maritime disputes all over the world. Hong Kong SAR: IRD issues guidance on ship leasing tax concessions | International Tax Review

Many professionals on international insolvencies have called for an international insolvency to solve the issues encountered by the growing range of transactional businesses facing bankruptcy under multiple and regularly conflicting countrywide laws. When an insolvent company’s operations span several countries, the company may be subject to conflicting national bankruptcy laws. When an insolvency spreads across several nations, different courts may not treat creditors equally. A universalist international insolvency treaty would resolve these problems by ensuring cooperation and mutual recognition of bankruptcy proceedings involving various nations’ courts. 

Despite the advantages of a universal insolvency system, a treaty to implement such a system would adversely affect another specialized area of law, admiralty. Both admiralty and bankruptcy laws apply when a shipowner becomes insolvent. Admiralty law is substantially similar internationally, unlike Bankruptcy laws. 

The IBC was introduced with the main aim to facilitate a corporate faltering in its debt obligations and to protect the interests of all the stakeholders with equity and the Admiralty (Jurisdiction and Settlement of Maritime Claims) Bill, 2016, was introduced with the intent to consolidate the existing laws on civil matters of admiralty jurisdiction of courts, admiralty proceedings on maritime claims, and arrest of ships. The conflict arises when a shipping company, being the owner of the vessel, becomes insolvent and goes into liquidation under the IBC.

The vessel is the subject matter under both the proceedings, as an offender under the Admiralty Act and as an asset under the IBC. In such a scenario, it becomes imperative to ascertain as to which Court or Tribunal would exercise its jurisdiction over the vessel and under which law. The issue of whether the IBC prevails over the Admiralty Act or vice versa has been decided by the High Court of Bombay in Atlantic Shipping Pvt. Ltd vs. Barge by an order passed on May19,2020.  The High Court of Bombay applied the rule of Harmonious Construction . Applying this principle, the High Court attempted to seek out the dispute between Admiralty Law and Insolvency Law.

Emphasis was placed on the distinction between an action in rem against a vessel and an action in personam. It was noted that once this distinction is recognized, whereby the vessel is a separate and distinct entity dehors its owner, it is easy to resolve the apparent conflict between admiralty and insolvency proceedings. Hence, it was held that an action in rem against the ship is neither an action against the owner of the ship who may be the corporate debtor as defined under the IBC nor a proceeding against the asset of the corporate debtor. It is a proceeding against the ship to recover the claim from the ship, whereby an action in rem continues as an action in rem, notwithstanding that the owner may have entered appearance, if security is not furnished for the release of the vessel.

Therefore, it is clear that there is no conflict between the Admiralty Law and the IBC, and both can be construed harmoniously . 

CASE LAWS

In Cliffs Neddrill Turnkey International vs. M/T Rich DukeThe collision of two vessels off the coast of Aruba was adjudicated in the District of Delaware because the two injured ships had limped into Delaware. The maritime law of Aruba applied, the plaintiff shipowner was Dutch, and the defendants were Bahamian and Japanese, the crews were South Korean, Dutch and American. All of these nations are unlikely to sign the same international insolvency treaty. 

In ABC Shipbrokers vs. The Ship ‘Offi Gloria’, while the shipowner was undergoing an insolvency proceeding in Texas, the vessel, registered under the flag of Cyprus, was arrested in New Zealand (after aborted attempts to arrest it in Indonesia, Hong Kong and Singapore), and plaintiffs were Greek and American. Again, these radically different nations are unlikely to sign an international insolvency treaty. 

In rem admiralty proceedings and the insolvency of a ship owner is fraught with tension. The advantage of arresting a ship, which elevates a maritime claimant to the status of a secured creditor, sits uncomfortably with principles of insolvency law, which do not contemplate an action in rem and the peculiar consequences that follow from it.

The conflict between these two special jurisdictions came to a head before the Bombay High Court, which in a recent judgement in Raj Shipping Agencies vs. Barge Madhwa and Anr, attempted to reconcile the irreconcilable.

Arrest orders were passed by the Bombay High Court against vessels, whose owners were insolvent. The High Court issued a winding up order against one of the ship owners under the Companies Act, 1956 (“Companies Act”). In parallel, insolvency proceedings were commenced against another ship owner by the National Company Law Tribunal and a moratorium ordered against commencement or continuation of all proceedings against that owner and its assets under the Insolvency and Bankruptcy Code, 2016 (IBC). 

The official liquidator in the winding up proceedings objected to the continuation of the admiralty actions without the leave of the Company Court under Section 446 of Companies Act, 1956 . As regards the insolvency proceedings against the other vessel owner, the maritime claimants argued that the morat

under the IBC would not prevent continuation of the admiralty actions in the Bombay High Court.

Question of law 

Issue 1. Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?

The Court observed that its endeavour would be to give effect to both statutes and their objectives so as to avoid conflict. The judgement proceeded to analyse the distinction between an action in rem under the Admiralty Act and an action in personam under IBC. The Court reasoned that an action in rem is not an action against the corporate debtor/owner of the ship or the assets of the corporate debtor/owner. It accordingly concluded that the moratorium under the IBC would not apply to an action in rem under the Admiralty Act for arrest of the ship and consequently would not prevent the commencement of admiralty proceedings.

According to the court, maritime claimants apart from being treated as secured creditors, should ordinarily be ascribed full value for their claim and the scheme of priorities under the Admiralty Act should be adopted in the resolution plan. The Court ruled that vessels arrested before the moratorium can only be released by the Admiralty Court, upon full payment of security.

The Court similarly reasoned that Section 33(5) of the IBC which bars the commencement or continuation of proceedings in liquidation, would not apply to an action in rem, as the claim is against the res and not against the corporate debtor.

Issue 2. Whether leave under Section 446(1) of the Companies Act is required for the continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed that owns the ship?

The Court observed that the Admiralty Act, 2017 is a consolidating enactment dealing with arrest of ships, maritime claims, judicial sale of ships and determination of priorities. The jurisdiction of the Admiralty Court was found to be special, unlike that of regular civil courts. A judicial sale of a ship by an Admiralty Court in a public auction is free from all prior claims, liens and encumbrances and the purchaser at the auction acquires a clean title free from any maritime liens, claims or encumbrances. This is unlike a sale of property conducted by the Company Court. The Court accordingly held that no leave of the Company court was required as the Admiralty Act, 2017 being a special enactment, would prevail over Companies Act, 1956

Diagrammatic Representation of Various Scenarios:

 

Conclusion

The jurisprudence in relation to the interaction and interplay of admiralty law and insolvency law is far from fully developed, and several issues still remain unanswered. In an admiralty action, jurisdiction may be exercised irrespective of the nationality of the ship or that of its owners, or the place of business, domicile or residence of its owners, or the place where the cause of action arose wholly or in part. In such a scenario, situations arise where the ship owner of a vessel is incorporated outside India and is subject to insolvency proceedings in the respective country. 

The law in this respect is still evolving and  it will be interesting to witness the interpretation and application of the principles of law in times to come.

Author: Khushi Kabra

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Corporate Debtor, Moratorium under Insolvency and Bankruptcy Code?

/in , , /by

Corporate Debtor, MORATORIUM UNDER IBC

What is Moratorium?

Since the implementation of the Insolvency and Bankruptcy Code, 2016, the word ‘moratorium’ has been construed by the judiciary on different levels. The word ‘Moratorium’ has not been defined anywhere in the code. According to the Oxford Dictionary, it means a legal authorization to debtors to postpone payment.

The moratorium under the code implies a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be initiated or proceeded against the Corporate Debtor.  Under section 13(1)(a) of the Code, the adjudicating authority is required to enforce a moratorium for matters mentioned in section 14.The Adjudicating Authority (NCLT or NCLAT), whilst taking up a petition against the Corporate Debtor is required to declare the moratorium period as described under Section 14 of the Code.

When a corporate debtor goes into Corporate Insolvency Resolution Process [hereinafter alluded to as “CIRP”], after the confirmation of the petition filed against the organization, a moratorium is announced whereby all the pending cases against the insolvent organization before any court have stayed.

When Moratorium Commence?

It comes into effect immediately after the application of provisions under Section 7,9 or 10, as admitted by the Adjudicating Authority. Insolvency Commencement Date is a date on which the moratorium is applied, and insolvency application is submitted.

What is Objective of a Moratorium under IBC?

Its main purpose is to keep the corporate debtor’s assets together during the CIRP and facilitate orderly completion of the process mentioned and to ensure that the company may continue as a going concern. It also ensures a bar upon the directors of the company, who can’t take any available money at the time of declaration of the moratorium. If the said period isn’t declared, the CIRP process will be thwarted which in turn will render the objective of the code null.

Section 14 – Moratorium 

(1)Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.

 

Section 14 (1) (a) Judicial Interpretations: Moratorium

  1. In Anand Rao Korada Resolution vs M/S Varsha Fabrics (P) Ltd., NCLT-Supreme Court held that the High Court ought not to have proceeded with the auction of the property of the Corporate Debtor, once there is an institution of proceedings under IBC. An order reporting moratorium was passed. Provisions regarding a moratorium cannot possibly apply to cash deposits made in the court.
  2. In India Infoline Finance Ltd. Vs. The State of West Bengal & Ors., it was held that any action of police must be based on the investigation, and it can’t take additional steps in the matter unless and until the CIRP ends, in a resolution or otherwise.
  3. The arbitration proceedings cannot go on, once the moratorium is imposed under S.14(1)(a). This was discussed in Alchemist Asset Reconstruction … vs M/S. Hotel Gaudavan Pvt. Ltd.
  4. Personal/Individual Assets of a director is not the subject matter of CIRP, and the moratorium only extends to the assets of the Corporate Debtor. Held in Suresh Chand Garg Vs. Aditya Birla Finance Ltd.
  5. The NCLAT in Canara Bank v. Deccan Chronicle Holdings Limited carved out an exception holding that the moratorium will not affect any proceedings initiated or pending before the Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of the Constitution of India. It also concluded that the moratorium will not affect the powers of any High Court under Article 226 of the Constitution of India.
  6. Clause (c) of the section mentions the term ‘security interest’, it doesn’t include the Performance Bank Guarantee.

Section 14(2): Continuance of Critical Supplies

It states that the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period. As per Regulation 32 of Insolvency & Bankruptcy (CIRP) Regulations, 2016.

Essential supplies mentioned in Section14(2) shall mean:

  • Electricity
  • Water
  • Telecommunication Service
  • Information Technology Services

NCLT Bench of Hyderabad, in Canara Bank v. Deccan Chronicle Holdings Limited, held that with the above-mentioned essential supplies, printing ink, printing plates, printing blankets, solvents, etc. will also come under the purview of exemption from the moratorium. It shall not be terminated or suspended during the period.

Section 14(3): Retrospective Effect

After the amendment through an ordinance, the assets of corporate guarantors or personal guarantors of the corporate debtor will not get the protection of stay provisions under section 14.

NCLAT, New Delhi in Alpha and Omega Diagnostics (India)Ltd. V Asset Reconstruction Company of India held that the personal properties of the promoters were given to the bank as security. It held that the said section only applies to assets of the corporate debtor and would not bar proceedings or actions against assets of third parties.

 

Retrospective Effect,

Through the 2018 Amendment, it was held that the moratorium provisions will not apply to a surety in a contract of guarantee for the corporate debtor, is retrospective.

Section 14(4): Commencement & Effective Period

This section sets out the limit for which the moratorium can be in effect, that is until the completion of the CIRP or on the approval of a resolution plan under Section 31 by the adjudicating authority or on a resolution of the committee of creditors to liquidate the corporate debtor under Section 33, whichever is earlier.

According to Section 12, the CIRP shall be completed within 180 days from the date of admission of the application, and the period can only be extended by 90 days, subject to an application being made to the adjudicating authority after a resolution is passed at a meeting of the committee of creditors by a vote of 75% of the voting share.

Section 74: Punishment for Contravention

Under this Section, officials of the corporate debtor who knowingly or wilfully violate the moratorium provisions can be imprisoned for a min. of three years, which may extend up to five years. Min. fine is of one lakh and max. is up to five lakhs, or with both.

If any creditor violates then the imprisonment is the same as above. The min. imprisonment is one year, and max. is up to five years whereas the min. the fine is one lakh and max. fine which can be imposed is up to one crore, or with both.

Where any corporate debtor or an officer or a creditor on whom the approved resolution plan is binding under Section 31, knowingly or wilfully contravenes any of its terms or abets, the min punishment is of one year which may extend up to five years, whereas the min. the fine is one lakh which may extend up to one crore, or with both.

Conclusion

In conclusion, it can be stated that IBC is silent on the aspect of the definition of moratorium and what proceedings will fall under the ambit of Section 14 of the IBC would still require judicial assessment. Nonetheless, the language of Section 14 of IBC is wide and the intention of the legislature is also to provide complete calm period. However, the Appellate Authority has carved out an exception to the moratorium in the matter of Deccan Chronicle7 and has held that the moratorium even in favor of the Corporate Debtor is also not absolute and it will not affect the proceedings before the Hon’ble High Court and Hon’ble Supreme Court under Article 32, 136 and 226/227 of the Constitution of India. Therefore, the issue whether the proceedings under Section 138 of NI Act will also be covered under the umbrella of moratorium and to what extent would still necessitate judicial examination and only time will set the issue at rest.

 

Author: Mohit Mathur

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Corporate Insolvency Resolution Process

/in , , /by

Corporate Insolvency Resolution Process

INTRODUCTION

In India, the Corporate Insolvency Resolution Process (“CIRP”) takes place under the Insolvency and Bankruptcy Code, 2016 (“IBC”). It involves a Resolution Professional inviting resolution plans for the corporate debtor undergoing insolvency. These plans are submitted by various Resolution Applicants and the best resolution plan is approved by the Committee of Creditors and sanctioned by the National Company Law Tribunal. Thus, from an acquisition perspective, the potential acquirer of the stressed asset is required to provide the best bid (in the form of the resolution plan) for the stressed asset which would be able to garner the approval of the Committee of Creditors.

Corporate Insolvency and Resolution Process - iPleaders

 

CIRCUMSTANCES WHEN CORPORATE INSOLVENCY RESOLUTION PROCESS TRIGGERED.

Corporate social insolvency process has been defined under the Chapter II of IBC licensed professional administrators the resolution process, manages the assets of the debtor, and provides information for creditors to assist them in decision making. The CIRP Triggered under Section 6 of IBC that is Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate a corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under preceding sections of chapter II of IBC like under section 7 Financial creditor can initiate the the resolution process by giving an application of corporate insolvency resolution process. (CIRP), same can be done by Operational creditor under section 8 & Section 9 and by Corporate applicant under section 10.

Section 7: Initiation of corporate insolvency resolution process by financial creditor.

(1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish—

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified.
(b) the name of the resolution professional proposed to act as an interim resolution professional and
(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).

Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate—
(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial creditor,

within seven days of admission or rejection of such application, as the case may be.

Section 8: Insolvency resolution by operational creditor.

(1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute.

(b) the payment of unpaid operational debt—

(i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor or

(ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

Explanation.—For the purposes of this section, a “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.

After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process under Section 9.

Section 10-Initiation of corporate insolvency resolution process by corporate applicant.

(1) Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.

(2) The application under sub-section (1) shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.
(3) The corporate applicant shall, along with the application, furnish-

(a) the information relating to its books of account and such other documents for such period as may be specified.

(b) the information relating to the resolution professional proposed to be appointed as an interim resolution professional and

(c) the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.

(4) The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order—

(a) admit the application, if it is complete and no disciplinary proceeding is pending against the proposed resolution professional; or

(b) reject the application, if it is incomplete or any disciplinary proceeding is pending against the proposed resolution professional :

Provided that Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice from the Adjudicating Authority.

(5) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (4) of this section.

“10A. Notwithstanding anything contained in Sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date as may be notified in this behalf.”

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation- For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.

Further Committee of creditor is to be made under Section 21 of IBC The committee of creditors shall comprise all financial creditors of the corporate debtor party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors Whereas the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them, The Board may specify the manner of determining the voting share in respect of financial debts issued as securities under sub-section (6) of Section 21. When a corporate debtor is accepted into the CIRP (Corporate Insolvency Resolution Process), it checks the board of directors. Further, the management is placed under an independent “interim resolution professional”. From this and till the end of the CIRP (Corporate Insolvency Resolution Process), the management ceases to have any control over the activities of the company.

MORATORIUM

Read more

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 3

/in , /by

As we discussed in the conclusion part of our 2nd Article on the subject matter, We concluded that the Amendment would cause resolution applicants to ensure that the interests of this unique class of creditors is protected and will also encourage all home buyers to exercise their rights responsibly and actively participate in the CoC meetings.

Image result for ibc amendment 2019However, there was one part which largely became the bone of contention amongst the property buyers. The amended Amended Subsection (1) of Section 7of the Insolvency and Bankruptcy Code (IBC) 2016 set the threshold of minimum 100 or 10% of allottees in a project or class of investors, for them to approach the NCLT in order to initiate the Insolvency Process against the defaulting developer.

The provision as amended read as follows:

Provided

that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first or second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, such application shall be modified to comply with the requirements of the first or second provisos as the case may be within thirty days of the commencement of the said Ordinance, failing which the application shall be deemed to be withdrawn before its admission..

The Property buyers aggrieved by the aforesaid amendment approached the Supreme Court and Hon’ble the Supreme Court provided partial relief to home buyers:

  • The NCLT will have to maintain status quo with respect to the applications already filed by home buyers, investors against defaulting developers as the constitutional validity of the IBC amendment will be tested by the SC after hearing the govt and the home buyers.

 

The Supreme Court has issued a notice to the Government of India on the petition filed by home buyers against the amendment of the Insolvency and Bankruptcy Code (IBC) 2016 which introduced a minimum threshold for filing an application with the National Company Law Tribunal (NCLT) against a defaulting developer. 

The Supreme Court after hearing the petition said that till further hearing the NCLT can’t reject the applications of the home buyers or investors for non-compliance of the new amendment brought in by the government introducing a minimum threshold for filing application under the Insolvency and Bankruptcy Code (2016).

The amendment required the existing applications which are yet to be accepted by NCLT to comply with the new regulations within 30 days of the passing of the ordinance. 

The Home buyers have argued that the amendment is arbitrary and discriminatory. Prior to this amendment even a single financial creditor, including a home buyer, with claims of at least ₹1 lakh could move NCLT against the defaulting developer.

The Supreme Court has granted a partial stay on the 3rd provision of Section 3 today and issued a notice to the Union of India. This means that all the petitions that were filed before the amendment shall not be bound by the 30 day period given to satisfy the amendment.

There are further changes to the IBC, which are enumerated below:

Amended Provisions of the CodeLegal position prevailing before OrdinanceNew legal position
1.Section 5 -DefinitionsSection 5(12) defines “insolvency commencement date” as the date of admission of application for initiating the Corporate Insolvency Resolution Process (“CIRP”) by the National Company Law Tribunal (“Adjudicating Authority”) under Sections 7, 9 or 10, as the case may be.

The proviso thereafter to Section 5(12) (which was inserted in the Code with effect from June 6, 2018) states that where the interim resolution professional (“IRP”) is not appointed in the admission order, the insolvency commencement date shall be the date on which such IRP is appointed by the Adjudicating Authority.

The proviso to Section 5(12) has been omitted.
Section 5(15) defines “interim finance” to mean any financial debt raised by the Resolution Professional (“RP”) during the CIRP period.The words “and such other debt as may be notified” has been inserted within the definition of “interim finance”
2.Section 7 – Initiation of CIRP by financial creditor.Section 7(1) states that a financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor (as may be notified by the Central Government) may file an application before the Adjudicating Authority for initiating CIRP against a corporate debtor when a default has occurred.

An Explanation is also given to the said section to clarify the meaning of default.

After Section 7(1), the provisos being inserted before the Explanation through the Ordinance provide for: –

Proviso 1– For financial creditors referred to in Section 21(6A) (a) and (b), the Section 7 application is required to be filed jointly by at least 100 creditors in the same class or 10% of the total number of such creditors in the same class, whichever is less;

Proviso 2– For homebuyers, the Section 7 application is required to be filed jointly by at least 100 allottees under the same real estate project or 10% of the total number of such allottees, whichever is less.

Proviso 3– The Section 7 applications filed by the financial creditors mentioned in the aforesaid provisos, which are presently pending before the Adjudicating Authorities, have to be modified within 30 days of the date of ordinance, failing which the application will be deemed to be withdrawn.

3.Section 11 – Persons not entitled to make applicationSection 11 states that certain persons, such as a corporate debtor undergoing CIRP, cannot file an application to initiate CIRP. An Explanation to the Section provides that ‘corporate debtor’ includes a corporate applicant in respect of such corporate debtor, for the purposes of this Section.Explanation-II has been inserted to provide an important clarification that the corporate debtor mentioned in the Section is not barred from initiating CIRP against another corporate debtor.
4.Section 14 – MoratoriumSection 14(1) provides that the Adjudicating Authority, on the insolvency commencement date, shall declare moratorium prohibiting certain actions.An Explanation has now been inserted after Section 14(1), clarifying that a license, permit, registration, quota, concession, clearances, or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other existing legal authority shall not be suspended or terminated on the grounds of insolvency. However, there should be no default in payment of dues arising during the moratorium period.
Section 14(2) states that the supply of essential goods or services to the corporate debtor shall not be terminated or interrupted during moratorium period.Sub-section (2A) has been inserted which states that where the IRP/RP considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated or interrupted during the moratorium period, except where such corporate debtor has not paid dues arising from supply during the moratorium period or in such circumstances as may be specified.
Section 14(3)(a) states that the provisions of moratorium will not apply to such transactions as may be notified by the Central Government in consultation with any financial regulator.Section 14(3)(a) has now been substituted to provide that the provisions of moratorium will not apply to such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.
5.Section 16 – Appointment and tenure of IRPSection 16(1) states that the Adjudicating Authority will appoint the IRP within 14 days from insolvency commencement date.The amended Section 16(1) provides for the appointment of IRP on the insolvency commencement date itself.
6.Section 21 – Committee of Creditors (“CoC”)Section 21(2) states that the CoC will comprise all financial creditors of the corporate debtor. The second proviso to Section 21(2) states that that the first proviso (related party of the corporate debtor not to be a part of CoC) will not apply to a financial creditor, regulated by a financial sector regulator, if it becomes a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.The second proviso to Section 21(2) has been further amended to include “or completion of such transactions as may be prescribed” before the words “prior to the insolvency commencement date”.
7.Section 23 – RP to conduct CIRPSection 23(1) states that the RP shall conduct the entire CIRP and manage the operations of the corporate debtor during the CIRP period. The proviso to Section 23(1) (which was inserted in the Code with effect from June 6, 2018) states that where the resolution plan has been submitted to the Adjudicating Authority for approval, the RP shall continue to manage the operations of the corporate debtor after the expiry of the CIRP period until an order of approval of resolution plan is passed by Adjudicating Authority.The existing proviso to Section 23(1) now stands substituted with a new proviso which states that the RP shall continue to manage the operations of the corporate debtor after the expiry of the CIRP period, until an order of approval of resolution plan (u/s 31(1) of the Code) or appointment of liquidator (u/s 34) is passed by the Adjudicating Authority.
8.Section 29A – Persons not eligible to be resolution applicantSection 29A provides a list of persons who are not eligible to submit a resolution plan.The Ordinance seeks to amend the meaning of “related party” provided in Explanation I to the second proviso in Section 29A(c) and second proviso to Explanation I in Section 29A(j). This amendment, which is on the lines of amendment to second proviso to Section 21(2) (as aforesaid), states that the expression “related party” shall not include a financial entity which has become a related party, inter alia, “on completion of such transactions as may be prescribed“.
9.Section 32A- Liability for prior offences, etc.

(NEW PROVISION)

Section 32A has been inserted after Section 32 in the Code to clarify the legal position on the liability for offences of the corporate debtor committed prior to commencement of CIRP.

  • Section 32A(1), incorporating the notwithstanding provision, states that the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease and the corporate debtor shall not be prosecuted for such an offence from the date of approval of resolution plan by the Adjudicating Authority, if the said resolution plan results in a change in the management or control of the corporate debtor to a person who is neither the erstwhile promoter or related party thereof nor an abettor or conspirator in the offence committed by the corporate debtor.
  • The first proviso to Section 32A(1) provides that any prosecution instituted against the corporate debtor during the CIRP will stand discharged from the date of approval of the resolution plan, subject to the fulfilment of requirement of this sub-section.
  • However, every person who was an “officer who is in default” (as defined in Section 2(60) of Companies Act, 2013) or a “designated partner” (as defined in Section 2(j) of LLP Act, 2008) or in any manner responsible for the conduct of the business of the corporate debtor, being directly or indirectly involved in the commission of the offence, shall continue to be prosecuted and punished for such offence committed by the corporate debtor (2nd proviso to Section 32A(1)).
  • Section 32A(2) states that no action shall be taken against the property of the corporate debtor in relation to the offence committed prior to the commencement of its CIRP, where such property is covered under the resolution plan approved by the Adjudicating Authority. However, the approved resolution plan should result in a change in the management or control of the corporate debtor or sale of liquidation assets under Chapter III of the Code to a person who is neither the erstwhile promoter or related party thereof nor an abettor or conspirator in the offence so committed by the corporate debtor.
  • The Explanation to Section 32A(2) clarifies the meaning of “an action against the property of the corporate debtor” to include attachment, seizure, retention or confiscation of such property. The Explanation further provides that Section 32A(2) will not bar any action against the property of any person, other than the corporate debtor or a person who has acquired such property through CIRP or liquidation process under the Code and fulfils the requirements specified in this section.
  • Section 32A(3) states that notwithstanding the immunity provided in this section, the corporate debtor and any other person (as may be required) shall extend all assistance and cooperation to any authority investigating an offence committed prior to the commencement of the CIRP.
10Section 227 – Power of Central Government to notify financial sector providers etc.Section 227 gives power to the Central Government to notify financial service providers or categories of financial service providers, in consultation with the appropriate financial sector regulators, for the purpose of their insolvency and liquidation proceedings, notwithstanding anything to the contrary examined in this Code or any other law for the time being in force.The Ordinance substitutes the words “examined in this Code” contained in Section 227 with “contained in this Code“. Further, an Explanation has been inserted to clarify that the insolvency resolution and liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.
11Section 239 – Power to make rulesSection 239 empowers the Central Government to make rules for carrying out the provisions of this Code on, inter alia, the matters mentioned in Section 239(2), from (a) to (zn).The Ordinance inserts clauses (fa) to (fc) after Section 239(2)(f) to empower the Central Government to make rules on transactions inserted vide this Ordinance in second proviso to Section 21(2), Explanation I to the second proviso in Section 29A(c) and second proviso to Explanation I in Section 29A(j) (such transactions which would not make the financial creditor a related party of the corporate debtor).
12Section 240 – Power to make regulationsSection 240 empowers IBBI to make regulations consistent with the Code and the rules thereunder, for carrying out the provisions of this Code on, inter alia, the matters mentioned in Section 240(2), from (a) to (zzzc).The Ordinance inserts clause (ia) after Section 240(2)(i) to empower the IBBI to make regulations on circumstances in which supply of critical goods or services may be terminated or interrupted during moratorium under Section 14(2A)

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 2

/in , /by

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated on December 28, 2019. The government had passed an ordinance to amend the code, with the result that a threshold of minimum 100 home buyers or 10% of total home buyers in a project, whichever is less, is required to take the builder to an insolvency court. Therefore, it becomes interesting to watch how does CIRP would be like after the amendment. Read Part 1

home buyers nclt ibc ordinance

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

Important amendments to the code:

The most pivoting amendment is the amendment to Section 25A of the Code. One of the drawbacks of the earlier scheme of the Code was the requirement of the vote of each home buyer being calculated individually in proportion to the individual debt owed to him and not as a class of financial creditors. This used to lead situations where none of the agendas put forth before the Committee of Creditors (“CoC”) could be approved, mainly due to many home buyers failing to exercise their votes and thus, the remaining financial creditors (including home buyers who did cast their vote) were not able to form the requisite majority (calculated on total debt share).

In such a scenario, if no Resolution Plan is approved, the corporate debtor was necessarily required to be liquidated. And on liquidation, home buyers being unsecured creditors would stand to lose priority to secured financial creditors such as financial institutions.

  • That the amendment sought to be moved through Ordinance, is set to benefit classes of creditors such as home buyers, the Amendment now rectifies this issue by empowering the authorized representative to cast the vote of the entire class of creditors represented by him in accordance with the decision approved by more than 50% of such class of creditors on a present and voting basis.

The Scenario of Typical CIRP before the Amendment for the Home Buyers would be like this:

  • if there are 1000 property buyers, in a real estate company undergoing CIRP, where the collective debt of the 1000 home buyers forms 70% of the total debt of all financial creditors. 
  • Out of these, 300 home buyers attend a meeting of the CoC and 270 of such home buyers, vote in favor of a particular agenda.
  • That before Amendment, the vote of the 270 home buyers who voted in favor of the agenda would only count to the extent of their respective individual debt share. 
  • Thus, although in the present example, almost all home buyers who were present had voted in favor of a particular agenda, the fact that a large number of home buyers abstained from voting would lead to failure to garner the minimum required percentage for approving that particular agenda. 

This might not present itself as an issue when minor decisions of the CoC are affected; however in a vote for the approval of a Resolution Plan, such a mechanism for calculating the vote would undoubtedly hinder the effectual resolution of any company undergoing CIRP.

The Scenario of CIRP after the Amendment would be like this:

  • Because the majority of the home buyers, i.e., 270 home buyers out of the 300 present and voting have voted in favor of the agenda, the vote of the entire class of financial creditors i.e. of 1000 home buyers forming 70% of total debt share would be cast by the authorized representative in favor of the agenda. 
  • Thus, now the authorized representative is required to extrapolate the vote of the 270 home buyers, to all the 1000 home buyers being a class of creditors, and backed by the entire voting share of this class, the vote of the collective class of creditors being home buyers would undoubtedly carry more weight and actually lend meaning to home buyers becoming part of the CoC.

Therefore, this Amendment would undoubtedly cause resolution applicants to ensure that the interests of this unique class of creditors is protected and will also encourage all home buyers to exercise their rights responsibly and actively participate in the CoC meetings.

IBC amendment: Supreme Court provides partial relief to home buyers

  • The NCLT will have to maintain status quo with respect to the applications already filed by home buyers, investors against defaulting developers, said Aditya Parolia
  • The constitutional validity of the IBC amendment will be tested by the SC after hearing the govt and the home buyers

Providing partial relief to home buyers, the Supreme Court has issued a notice to the government of India on the petition filed by home buyers against the amendment of the Insolvency and Bankruptcy Code (IBC) 2016 which introduced a minimum threshold for filing an application with the National Company Law Tribunal (NCLT) against a defaulting developer. “This basically means that the NCLT will have to maintain status quo with respect to the applications already filed by home buyers and investors against defaulting developers,” said Aditya Parolia of PSP Legal, Advocates & Solicitors.

However, the legality and constitutional validity of the amendment will be tested by the Supreme Court after hearing the government and the home buyers, he added. The government recently amended the Insolvency and Bankruptcy Code (IBC) 2016 through an ordinance introducing a threshold of minimum 100 or 10%of allottees in a project or class of investors required that can approach the NCLT in order to start the liquidation process against the defaulting developer.

The Supreme Court after hearing the petition said that till further hearing the NCLT can’t reject the applications of the home buyers or investors for non-compliance of the new amendment brought in by the government introducing a minimum threshold for filing application under the Insolvency and Bankruptcy Code (2016).

The amendment required the existing applications which are yet to be accepted by NCLT to comply with the new regulations within 30 days of the passing of the ordinance. “This is certainly good news for home buyers as under the ordinance there was a clause which says all matter will be dismissed automatically within 30 days if they don’t meet the criteria. So, that has also been put on hold ,” said Aditya Parolia of PSP Legal, Advocates and Solicitors. The Home buyers were represented by the Advocate Piyush Singh and Advocate Aditya Parolia of PSP Legal, Advocates and Solicitors before the Supreme Court.

“However, there is no clarity on the threshold limit as of now as the bench didn’t comment on the same,” said Parolia. Challenging the ordinance, group of home buyers and investors had filed multiple writ petition with the Supreme Court challenging the amendment. Home buyers have argued that the amendment is arbitrary and discriminatory. Prior to this amendment even a single financial creditor, including a homebuyer, with claims of at least ₹1 lakh could move NCLT against the defaulting developer.

Clients of Karvy Private Wealth who saw defaults on their loans to builders introduced by Karvy have also challenged recent amendments to the Insolvency and Bankruptcy Code (IBC). “The Supreme Court has granted a partial stay on the 3rd provison of Section 3 today and issued a notice to the Union of India. This means that all the petitions that were filed before the amendment shall not be bound by the 30 day period given to satisfy the amendment.,” said Advocate Srijan Sinha, a lawyer practicing in the Supreme Court.

 

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 1

/in , /by

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated on December 28, 2019. The government had passed an ordinance to amend the code, with the result that a threshold of minimum 100 home buyers or 10% of total home buyers in a project, whichever is less, is required to take the builder to an insolvency court.

  

Home Buyers NCLT IBC Oridnance

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

Background:

The Ordinance amends the Insolvency and Bankruptcy Code, 2016. Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.  The Code provides a time-bound process for resolving insolvency.

“This is against the interest of home buyers as it puts unreasonable conditions on them, destroys level playing field which currently exists and makes the law lopsided in favour of real estate developers. The amendment being brought under influence of builders is not only illogical, illegal but also regressive to say the least,” said FPCE (The Forum for People’s Collective Efforts)’s letter to the standing committee chairman.

Minimum threshold for initiating the resolution process:

  • Under the Code, a financial creditor (either by itself or jointly with other financial creditors) may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process.  The Ordinance amends this to provide minimum thresholds for certain classes of financial creditors for initiating the insolvency resolution process. In case of real estate projects, if an allottee (person to whom a plot, apartment, or builder has allotted or sold the building) wants to initiate the resolution process, the home buyers should file an application jointly by at least 100 allottees of the same real estate project, or 10% of the total allottees under that project, whichever is less.
     

For other financial creditors, where the debt owed is either:

  1. in the form of securities or deposits, or
  2. to a class of creditors, the application should be filed jointly by at least 100 creditors in the same class, or 10% of the total number of such creditors in the same class, whichever is less.
     

Restriction on persons allowed to make applications:

The Code restricts certain corporate debtors from making an application to initiate the insolvency resolution process. These include, corporate debtors :

  1. undergoing an insolvency resolution process,
  2. who have completed the resolution process 12 months before making the application,
  3. or financial creditors who have violated terms of the resolution plan, or
  4. in respect of whom a liquidation order has been passed. 

The The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, clarifies that such corporate debtors will be allowed to initiate the resolution process against other corporate debtors.
 

Permits, licenses and registrations not to be terminated on the ground of insolvency:

The Ordinance states that any existing license, permit, registration, quota, concession, or clearance, given by the government or local authority, will not be suspended or terminated on the grounds of insolvency.  However, there should be no default in payment of current dues for the use or continuation of such grants.
 

Supply of critical goods and services not to be discontinued:

  • The The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 states that the resolution professional may order that the supply of certain goods and services which are critical for the corporate debtor’s operations cannot be discontinued during the moratorium period.  The moratorium period refers to the time period during which the NCLT may prohibit persons from taking certain actions against the corporate debtors, such as filing of recovery suits. This provision will not apply if the debtor has unpaid dues to the suppliers or in certain other specified circumstances.
     

Liability for prior offences: 

  • The resolution plan under the Code may result in change in the management or control of a corporate debtor to other persons.   The Ordinance states that in such cases, the corporate debtor will not be liable for any offences committed prior to the commencement of the insolvency resolution process.  The liability will cease from the date the plan is approved by the NCLT. The Ordinance also provides immunity to the corporate debtor from actions against their property, such as attachment, confiscation or liquidation of property, in such cases.
     

Immunity to apply in certain cases: 

The immunity against prior offences will be available if such other person

  1. was not a promoter or in the management or control of the corporate debtor, or a related party of such a person,
  2. was not a person against whom investigating authorities have submitted or filed a complaint, or have reasons to believe that the person abetted or conspired to commit the offence.

To read part 2 click here.

Original Text :

Source Credit: Prs Legislative Research