The Insolvency and Bankruptcy (Amendment) Bill, 2020 (hereinafter Bill, 2020) was passed in Lok Sabha on 06.03.2020 subsequent to scrutinization by Standing Committee who submitted its report on 04.03.2020. The Bill was introduced in the Rajya Sabha House by Finance Minister; Ms. Nirmala Sitharaman on 12.12.2019. The Rajya Sabha passed the bill on 12.03.2020 by voice vote. The Bill received President’s assent on 13.03.2020 thereby becoming law in form of Insolvency and Bankruptcy (Amendment) Act, 2020 (hereinafter Act, 2020)[1]. The Act, 2020 replaces Insolvency and Bankruptcy (Amendment) Ordinance, 2019 (hereinafter Ordinance, 2019) promulgated in December, 2019. The present Act marks the fourth legislative intervention as amendment to the Insolvency and Bankruptcy Code, 2016 (hereinafter Code). The Act aims to remove bottlenecks and streamline the Corporate Insolvency Resolution Process and seeks to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of the previous owners.
In view of Statement of Objects and Reasons of the Bill, 2020, need was felt to give the highest priority in repayment to last mile funding to corporate debtors to prevent insolvency, in case the company goes into corporate insolvency resolution process or liquidation, to prevent potential abuse of the code by certain classes of financial creditors, to provide immunity against prosecution of the corporate debtor and action against the property of the corporate debtor and the successful resolution applicant subject to fulfilment of certain conditions, and in order to fill the critical gaps in the corporate insolvency framework, it has become necessary to amend certain provisions of the Code. This Amendment will help safeguard successful bidders of insolvent companies from the risk of criminal proceedings for offences committed by previous promoters.
The Act, 2020 amends Section 2 clarifying insolvency commencement date which is date of admission of and application for initiating Corporate Insolvency Resolution Process and not when Interim Resolution Professional is appointed by the Adjudicating Authority. The Act deletes proviso from the definition of insolvency commencement date under Section 5(12) of the Code. This Amendment also brought corresponding change in Section 16(1) of the Code by curtailing anticipated delay in completion of resolution to the extent of 14 days. Section 16(1) mandates Adjudicating Authority to appoint Interim Resolution Professional on the insolvency commencement date thereby withdraw leeway of 14 days period from insolvency commencement date for appointment of Interim Resolution Professional.
The Act provides minimum threshold for certain classes of financial creditors for initiating insolvency resolution process. Besides that Code allows creditors to initiate insolvency resolution process if amount of default by debtor is at least rupees 1 lakhs, Act adds an additional requirement for certain classes of financial creditors for filing application which includes real estate allottees, security or deposit holders represented by a trustee or agent. Section 7 is amended wherein Explanation II is inserted whereby clarifying financial creditors who are allottees under real estate project and falling under category of creditors referred under Section 21(6a)a, b may initiate Corporate Insolvency Resolution Process against corporate debtor before adjudicating authority by filing joint application comprising of not less than 100 of allottees under same real estate project/ creditor in same class, or not less than 10% of total number of allottees under same real estate project/ creditor in same class, whichever is less. It further prescribes 30 days time for modification of application if not admitted by Adjudicating Authority failing which it shall be deemed to be withdrawn. The Corporate Debtors referred in Section 11 (a-d) are now permitted to initiate Corporate Insolvency Resolution Process which was not allowed earlier/ previously. The Act clarifies the divergent views taken in Jai Ambe Enterprise v. S.N. Plumbings Pvt. Ltd.[2] and Asian Plumbings and Mandhana Industries Ltd. v. Instyle Exports Pvt. Ltd.[3] & upheld Jai Ambe view. The Act prescribes limit for appointment of Interim Resolution Professional by amending Section 16 which is now from the date on which insolvency is commenced from “within period of 14 days from insolvency commencement date”. Furthermore, Section 14 is amended to the extent that there shall be no suspension, termination of licence, permit, registration, quota, concession, clearances or similar grant or right given by Central, State, Local Government, sectoral regulator or any other authority under Moratorium period on ground of insolvency but subject to condition that it shall ensure no default in payment of current dues arising in relation to the use or continuation of such license, permit, etc. under Moratorium period. Section 240(2)ia was inserted vide the act whereby there shall be continuation of supply of goods, services critical to Corporate
Debtor which may be suspended, terminated or interrupted during moratorium period. As consequence, Section 14(2A) was inserted whereby Interim Resolution Professional considers supply of goods, services critical to protect, preserve value of corporate debtor and manages operations as going concern, then it shall not be terminated, suspended or interrupted except where corporate debtor has not paid the dues or as specified. In Dakshin Gujarat VIJ Company Ltd. v. ABG Shipyard & Innoventive Industries Ltd. v. Maharashtra State Electricity Distribution Company Ltd.[1], it was observed and specified supply of critical goods and services to Corporate Debtor is based on payment of dues arising therefrom.
The Act by inserting new Section[2] provides for cessation of liability of corporate debtor for offence committed prior to commencement of Corporate Insolvency Resolution Process and discharges it from prosecution for such offence from date of resolution plan has been approved by the Adjudicating Authority under Section 31 but it must result in change in management or control of corporate debtor. However, this is subject to exception that person being an officer who is in default under Section 2(60) of Companies Act, 2013 or a designated partner under Section 2(j) of the Limited Liability Partnership Act, 2008 or in-charge of, responsible to corporate debtor for conduct of its business or associated with corporate debtor and directly or indirectly involved in commission of offence in accordance with report submitted or complaint filed by investigating authority shall continue to be liable to be prosecuted and punished for such offence committed by corporate debtor. With regard to property of corporate debtor, no action shall be taken for offence prior to commencement of corporate insolvency resolution process of corporate debtor which results in change in control of corporate debtor or sale of liquidation assets. NCLT, Mumbai Bench[3] observed that IBC would have overriding effect on PMLA and attachment order of assets passed would be nullity, non-est in law. Delhi High Court[4] in their judgment held that regulations and the code must co-exist which shall be construed, enforced harmoniously without being derogation. NCLAT[5] held that PMLA is of different fields of penal action and Section 14 is not applicable to criminal proceedings.
The Sec. 23(1) proviso clarifies Interim Resolution Professional shall continue to manage operations of corporate debtor after expiry of corporate insolvency resolution process period until order approving resolution plan under Sec. 31(1) or appointing a liquidator under Sec. 34 passed by Adjudicating Authority. Explanation has been inserted to Sec. 227 which provides for financial service providers may be conducted as prescribed with modifications. This is in consonance with Insolvency and Bankruptcy (Insolvency & liquidation proceedings of financial service providers and Application to Adjudication Authority) Rules, 2019. The addition of “& such other debt as may be notified” under Sec. 5(15) has widened the definition and ambit of interim finance. Apex Court in its judgment[6] dealt with deemed extension of lease granted by Govt. by observing that object of moratorium is to preserve status quo and not create new right and Sec. 14(1)d prohibits right not to be dispossessed but not right to have renewal of lease of such property. NCLAT in its conflicting judgments[7] interprets definition of “essential goods, services” in Sec. 14(2) wherein one interprets strictly but other held that water, electricity, printing ink, blankets, plates and solvents will come under its purview of exemption granted. The Amendment[8] will ease functioning of interim resolution professional which shall be an essence to dispensation with requirement of filing endless applications for directions. It specifically authorizes interim resolution professional to manage affairs during interregnum from rejection to interim resolution professional till appointment of liquidator. The new Sec. 32A is significant to shield successful resolution applicants and property from threat to criminal proceedings qua offences committed by former promoters of corporate debtors. Sec. 7 is far reaching amendment likely to be greeted with constitutional challenge by homebuyers. Homebuyers have already granted status of financial creditors vide 2018 Amendment thereby inserting explanation to Sec. 5(8)f to empower them to be part of Committee of Creditors. Sec. 14(2A) confers interim resolution professional to determine critical goods and services to protect, preserve value corporate debtor’s value and
manage operations as going concern. The IBBI[1] as per Sec. 240(2)ia is authorized to make regulations to provide circumstances for termination, suspension or interruption during moratorium period[2]. Supreme Court vide its judgment[3] dated 19.01.2021 in Manish Kumar v. Union of India & Ors. W.P. (C) bearing No. dismissed writ petition and Transferred case subject to directions thereby upholding Impugned Judgments thereby upheld validity of amendments made to IBC that mandated minimum 100 home buyers to come together to file insolvency application in National Company Law Tribunal to trigger IBC against defaulting Developer. The Act, 2020 brings much needed changes in the Code thereby tackled interest of all including lenders, borrowers and operational creditors. The strict timeline would be an incentive for a major boost to the economy and the timely resolution would be an impetus for certainty in recovery. It utilizes legal instruments for addressing business and economic nature problems. It would thus be welcome change in comparison to other regimes which used to consume decades for conclusion. It would ensure smooth sail strengthening escalating cases through the process. It would further speed up the adjudication process of pending insolvency cases. It will prevent and scrutinize the shortcomings thereby making process efficient and creditor friendly. This is a major shift to global parameters to keep demand of corporate sector. The newly setup NCLAT, Chennai Bench is one of the measures to tackle pendency and expedite insolvency process. The IBBI amended Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 vide Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020[4]. “The Amendments are sync with time and also adhere to Apex Court in “letter and spirit”. The Government is taking care of interest of homebuyers and requirement of minimum numbers of home buyers to avoid frivolous litigations[5]”.
[1] NCLT, Mumbai Bench
[2] NCLT, New Delhi Bench
[3] The Act came into force on 28.12.2019.
[4] NCLAT Judgments
[5] Section 32A
[6] Sterling SEZ Infrastructure Ltd. v. Deputy Director, Directorate of Enforcement.
[7] The Deputy Director, Directorate of Enforcement, Delhi v. Axis Bank & Ors.
[8] Varrsana Ispat ltd. v. Deputy Director, Directorate of Enforcement & in Rotomac Global Pvt. Ltd. v. Deputy Director, Directorate of Enforcement
[9] Embassy Property Development Pvt. Ltd. v. State of Karnataka (Civil Appeal 9170/2019) 03.12.2019
[10] ICICI Bank Ltd. v. M/s Innoventive Industries Ltd. & Canara Bank v. Decccan Chronicle Holdings Ltd.
[11] Section 23
By: Jahnvi Sharma and Kamakshi Sehgal, Advocates
