On November 25 2016, the provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (SICA Repealing Act) were notified with effect from 1 December 2016. This means that the Sick Industrial Companies (Special Provisions) Act 1985 stands repealed and consequently, the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (Appellate Authority) are dissolved. On the same day, Section 4(b) of the SICA Repealing Act, as substituted by the Eighth Schedule of the Insolvency and Bankruptcy Code 2016 (Code), was also notified with effect from 1 December 2016. It seems that as a corollary to these notifications and possibly to avoid creating a vacuum in the legal process, the Government of India decided to notify substantive parts of the Code relating to corporate insolvency resolution process on 30 November 2016, effective from 1 December 2016.
In our Ergo Newsflash of 25 November 2016 we had outlined that the Code was being notified in phases and that the provisions dealing with intermediaries had been notified into law on 27 November 2016. In May 2016, we had shared our thoughts on the broad contours of the Code with you. In addition to these, we provide below in FAQ format (i) a brief outline of what has been notified; and (ii) the implication of notifying the SICA Repealing Act on the Code.
The Code is here; long live the Code
What provisions of the Code have been notified?
Per the latest notification issued on 30 November 2016, the provisions relating to corporate insolvency have been notified into law, namely:
In addition, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 were also notified with effect from 1 December 2016. These regulations are substantive guidelines which outline how a corporate insolvency resolution process can be triggered, what constitutes proof of claim, the governance of the committee of creditors, and the power of the insolvency professional, amongst other things.
Impact of the notification of the SICA Repealing Act
What does notifying the SICA Repealing Act and, inter alia, Part II (Chapter 1 and 2) of the Code (both effective from today, 1 December 2016) mean for pending cases under the erstwhile SICA?
Section 252 of the Code, notified on 1 November 2016, amended the SICA Repealing Act by substituting Section 4(b) therein with the Eighth Schedule of the Code. This was later followed by the notification on 25 November 2016 notifying the SICA Repealing Act itself with effect from 1 December 2016. The net effect of this is that BIFR and the Appellate Authority are, as of today functus officio (ie defunct). In terms of the Eighth Schedule of the Code, it means that any appeal preferred to the Appellate Authority or any reference made to the BIFR or any inquiry pending before the BIFR or any other authority or any proceeding of whatever nature pending before the Appellate Authority or the BIFR immediately before the commencement of the SICA Repealing Act stand abated. Any company in respect of which such an appeal or reference or inquiry stands abated has been given an option to make an application to the NCLT under the Code within 180 (One hundred and eighty) days from the commencement of the Code in accordance with the provisions therein. The provisions of the Code giving such an option have come into force from 1 December 2016.
What is the impact of the SICA Repealing Act on the orders passed either under Section 22 of SICA or scheme sanctioning order or any other order affecting the rights of the parties therein?
As stated above, the SICA Repealing Act read together with Section 252 of the Code, does state that all proceedings pending before the BIFR or Appellate Authority, shall stand abated with effect from 1 December 2016. However, the SICA Repealing Act also contains a “savings” section. The way this section is drafted, it intends to “save” any rights and obligations which have vested in a party under SICA upon its repeal. Given the substantive nature of the above orders passed under SICA, it may be argued by some that these orders are saved. Having said this, considering that the criteria for reference to NCLT and declaration of moratorium under the Code are substantively different from what was prescribed under SICA, it remains to be seen if such an interpretation is maintainable and merits a clarification from the Government to remove ambiguity.
Do the notified provisions of the Code apply to all companies (and not just industrial companies)? What is the test for “sickness” under the Code?
The Code is a significant change from the erstwhile SICA regime, particularly on this point. As a remedy, the Code is available for and against all companies and partnerships in India, but as of now only against companies and limited liability partnerships. Further, as a remedy it is available not just to scheduled commercial banks in India but to all financial creditors (ie lenders or beneficiaries of corporate guarantees) and operational creditors (ie trade creditors).
Furthermore, the balance sheet test under SICA for determination of “sickness” has been replaced with a low threshold cash flow test. Where a corporate debtor has committed a default of INR 100,000 (Indian Rupees One lakh) or more, an operational creditor or a financial creditor or corporate applicant itself may initiate a corporate insolvency resolution process.
The notification of the SICA Repealing Act was an overdue event. However, there remain some grey areas in the interpretation of the SICA Repealing Act vis-à-vis its interplay with the Code, which may result in opportunistic interpretations of the SICA Repealing Act.
As on 1 December 2016, substantive as well as procedural provisions of the Code dealing with corporate insolvency resolution process have been notified into law. Amongst several other aspects, this means that any financial/operational creditor can initiate corporate insolvency resolution process against a defaulting company in accordance with the provisions of the Code. The Code replaces the erstwhile “debtor‑in‑possession” model of Indian insolvency law with a “creditor-in-possession” model, thereby allowing the committee of creditors and the insolvency professional to replace the board of directors of the borrower. These, amongst others, are important elements of the Code, which now stands notified into law.