In our previous publication on the subject, we had discussed the changes introduced by the Ordinance dated 23 November 2017 (the Ordinance), amending the Insolvency and Bankruptcy Code, 2016 (Code) (see our Ergo Newsflash dated 24 November 2017).
The Ordinance was sought to be replaced by the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 which was passed by the Lok Sabha late last year, and thereafter by the Rajya Sabha on 2 January 2018. Following the presidential assent on 18 January 2018, the Insolvency and Bankruptcy Code (Amendment) Act, 2017 (Amendment Act) has now been notified in the official gazette and has come into force retrospectively from 23 November 2017, i.e. the date of the Ordinance.
Corporate Insolvency Resolution Process | Current Provisions
Prior to the promulgation of the Ordinance, Section 2(25) of the Code permitted “any person” to submit a resolution plan to the Resolution Professional (RP) and participate in the Corporate Insolvency Resolution Process (CIRP) for acquiring the distressed assets. This was sought to be restricted in terms of Section 29A introduced by the Ordinance which made certain persons ineligible to submit a resolution plan. However, the language under the Ordinance created some unintended consequences which are sought to be addressed through the Amendment Act.
Changes to Disqualification Criteria
Section 29A of the Amendment Act further widens and clarifies the ineligibility criteria for resolution applicants as set out in the Ordinance (see our Ergo News Flash dated 24 November 2017). The language in the Amendment Act states that resolution applicants will be ineligible if such resolution applicant or any person acting jointly or in concert with the resolution applicant meets the ineligibility conditions stipulated in Section 29A, sub‑clause (a) to sub-clause (j). This, in effect, makes the scope of ineligibility wider by covering both formal and informal arrangements within its scope in line with the position prescribed under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Some other critical modifications to the disqualification criteria are set out below:
- The Ordinance inserted a new Section 29A(c) to the Code as a result of which, a person whose account had been classified as an NPA for a period of over 1 (one) year from the date of classification and who failed to make the payment of all NPA related overdue amounts and interest / charged before submission of a resolution plan stood disqualified.
Section 29A(c) has been broadened by the Amendment Act to the effect that the scope of the section now extends not only to a borrower under default whose account has been classified as a NPA for a period of more than 1 (one) year but also a person who is in management or control of such defaulter.
- Section 29A(g) has been aligned with the Code to include extortionate credit transactions, in addition to the earlier ineligibility prescriptions of ‘preferential, fraudulent and undervalued transactions’.
- Sections 29A(e) and 29A(f) made the following persons ineligible, who are:
- disqualified from acting as a director under Companies Act, 2013; and/ or
- prohibited from trading in or accessing the securities markets under any order or directions of the Securities and Exchange Board of India;
As mentioned earlier the disbarment covered even historical offences. This has been narrowed to only current prohibitions and disqualifications.
- The Amendment Act has now exempted (i) scheduled commercial banks; (ii) asset reconstruction companies; and (iii) asset reconstruction companies, from the purview of ‘connected persons’, keeping in mind their diversified holding and investor base.
- The Ordinance addressed existing CIRP cases and amended Section 30(4) of the Code to, inter alia, provide that the Committee of Creditors (CoC) would not accept the plans submitted prior to the Ordinance if the resolution applicant is ineligible under section 29A and in the absence of other plans, the RP would be required to invite fresh resolution plans.
The Amendment Act, however, makes an exception for allowing resolution applicants disqualified under Section 30(4) and Section 29A(c) who are otherwise ineligible to submit the resolution plan. The CoC may permit a disqualified resolution applicant from clearing all overdue amounts within a 30 days’ period. However, the amended provision clarifies that CoC extending such cure period to the resolution applicant, would in no way be deemed to extend the maximum permissible corporate insolvency resolution period (i.e. 180/ 270 days).
Confidential Liquidation Value
As part of the CIRP, the resolution professional was mandated to specify the liquidation value and the liquidation value due to operational creditors in respect of a corporate debtor in the information memorandum handed to all resolution applicants.
However, as per a recent amendment to the CIRP Rules (which preceded the notification of the Amendment Act), this requirement has now been removed. Resolution applicants are required to bid on their own diligence rather than the disclosed liquidation value which was perceived to be a drag on the bid price.
While the Amendment Act broadens the ineligibility criteria and removes some of the unintended consequences of the Ordinance, it also provides some useful exemptions in terms of which an ineligible person can bid after clearing the overdue. Whether this is a realistic exemption and would be availed by the promoters is to be seen.
In addition, the restriction on disclosure of liquidation value is intended to improve bid price and prospects of recovery for the lenders. However, this puts the onus on the bidders to conduct thorough diligence and factor in the risk and contingencies in their resolution plan, in the absence of any recourse against the CoC on this count, as per the scheme of the Code.