Sailent features of the amendment to the IBC Code

Author by Faranaaz G Karbhari

Introduction:

On March 13, 2020, the Insolvency and Bankruptcy Code (Amendment) Bill, 2020, which  was passed by both the houses of the Parliament, received the President’s assent to become a law in the form of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“Amendment Act”). The Amendment Act aims to streamline the Corporate Insolvency Resolution Process (“CIRP”) and provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners. By way of the Act, The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was also repealed.

Salient Features:
  • Insolvency commencement date:

The proviso to Section 5(12) of the Insolvency and Bankruptcy Code (“Code”) has been deleted thereby making it clear that the insolvency commencement date would be the date of admission of an application for initiating CIRP by the National Company Law Tribunal (“NCLT”) under Sections 7/ 9 or 10, as the case may be.

Earlier, the proviso to Section 5(12) (which was inserted in the Code with effect from 6th June 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.

  • Prescribing a threshold for initiating Resolution Process:

Section 7 of the Code has been amended to the extent that a threshold for initiating Resolution Process for a certain category of financial creditors has been put in place. The Proviso’s 1 and 2 to this section elucidates that the financial creditors who are allottees under a real estate project; and financial creditors falling in the category of creditors referred to in Section 21(6A) (a) and (b), may initiate CIRP against the corporate debtor before the adjudicating authority by filing a joint application comprising of not less than 100 such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate project, whichever is less.

  • Corporate debtors allowed to initiate CIRP against other Corporate debtors

By way of the Amendment Act, explanation II has been added to Section 11 of the Code which states  that corporate debtor as referred to in clauses (a) to (d) of Section 11 of the Code will now be permitted to initiate CIRP against other corporate debtor’s, which was not allowed earlier.

  • No suspension/ termination of licenses, permits etc. issued by the Government, during moratorium

An explanation to Section 14 of the Code has been inserted in order to clarify that a license, permit, registration, etc. given by the Central Government or any other authority shall not be suspended or terminated on the grounds of insolvency, subject to there being no default in payment of current dues arising for the use or continuation of the license, permit, etc. during the moratorium period.

The changes have been made again for keeping the thrust of going concern and to maximise the value of a corporate debtor.

  • Continuance of supply of goods/ serviced critical to Corporate Debtor

It is common knowledge that as per Section 14(2) of the Code, the supply of essential goods or services to the corporate debtor could not be terminated or interrupted during moratorium. With the new amendment, sub-section (2A) has been inserted which states that where the IRP/ IRP considers the supply of goods/ 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 moratorium, except where the corporate debtor has not paid dues arising from supply during moratorium.

  • Appointment and tenure of IRP

Earlier, the Adjudicating Authority had to appoint an IRP within 14 days from insolvency commencement date. In light of the amended Section 16(1), the IRP must be appointed on the date which the insolvency has commenced, itself.

  • Liability for prior offences

A new section namely, Section 32A has been inserted by way of the Act which provides that the corporate debtor will not be liable for an offence committed prior to the commencement of CIRP from the date the resolution plan is approved by the Adjudicating Authority. However, the approved resolution plan must result in change in the management or control of the corporate debtor as prescribed in Section 32A. The said Section further discharges the corporate debtor from any prosecution that has been instituted against it during the CIRP on the approval of the resolution plan, however, the officer who is default in case of a company and a designated partner in case of an LLP shall continue to be liable for any such offence committed by the corporate debtor. In respect to such scenario, this Section also safeguards the property of the corporate debtor from actions such as attachment, seizure, retention or confiscation of such property.

Conclusion

In the years since the act came into force and with the changing times and scenario there has been a need felt to give priority in repayment to last mile funding  to corporate debtors to prevent insolvency i.e in case the company goes into corporate insolvency resolution process or liquidation. The amendment was necessary in order to prevent potential abuse of the Code by certain classes of financial creditors. The amendment also provides immunity against prosecution of the corporate debtor, action against the property of the corporate debtor and the successful resolution applicant subject to fulfilment of certain conditions. The amended act was needed in order to fill the critical gaps in the corporate insolvency framework. The act seeks to remove bottlenecks and streamline the corporate insolvency resolution process.

Lenders face a choice between debtor, guarantor

Authored by Partner Ramya Hariharan along with Associate Asmita Rakhecha

Guarantee as a form of collateral security is popular in financing deals as the liability of a guarantor and the principal debtor are coextensive. Thus, the creditor has a remedy against both the principal debtor and the surety without having to exhaust the remedy against one of the parties before proceeding against the other. Despite this well-established principle, the question of whether simultaneous proceedings can be initiated against the principal debtor and guarantor was the subject of debates under the Insolvency and Bankruptcy Code, 2016 (code).

The National Company Law Appellate Tribunal (NCLAT), in the Vishnu Kumar Agarwal v Piramal Enterprises Ltd case, did not allow simultaneous proceedings against corporate guarantors for the same debt. Piramal Enterprises, a financial creditor, had instituted a corporate insolvency resolution process (CIRP) against the two corporate guarantors – Sunrise Naturopathy and Resorts and Sun system Institute of Information Technology for a debt owed to it by All India Society for Advance Education and Research. It had not initiated a CIRP against the borrower. The NCLAT was faced with two questions – whether a CIRP can be initiated against corporate guarantors without initiating one against the principal borrower, and whether a CIRP can be initiated against two corporate guarantors simultaneously.

The NCLAT answered the first question in the affirmative. However, with regards to the second question, the NCLAT held that though there is no bar in the code for filing applications simultaneously, once one of the applications is admitted, the financial creditor cannot proceed against the others. The rationale was that the code does not have the provision for filing a joint application against multiple corporate debtors unless they are combined in a joint venture company. The NCLAT held that for the same set of debts, a claim cannot be filed by the same financial creditor in two separate CIRPs. This means the lender is barred from pursuing parallel proceedings and it cannot participate in the CIRP of both the borrower and the guarantor even if such proceedings or one of them have been initiated by any other creditor or by the debtor itself.

The NCLAT dismissed the CIRP against the first guarantor as a CIRP against the second guarantor had already been admitted. The NCLAT held that the once a CIRP is admitted against the second guarantor, the first guarantor can say that the debt in question is not due as it is not payable in law, because it has been shown that the debt is payable by the second guarantor. This reasoning goes against the law relating to guarantees, where the guarantors may be jointly or severally liable for the debt. The admission of claim against one cannot constitute extinction of the right against the other.

The NCLAT had, in the ICICI Bank v Vista Steel Private Limited case, allowed a CIRP against the respondent guarantor despite a CIRP being admitted against the borrower and a resolution plan approved for the borrower. Thus, it appears that the NCLAT has been taking contrary positions on the question of simultaneous proceedings against guarantors and borrowers.

The Insolvency Law Committee (ILC), in a report, observed that having a remedy against both the surety and the debtor without the obligation to exhaust the remedy against one before proceeding against the other, is of utmost importance for the creditor and is the hallmark of a guarantee contract. The availability of such a remedy is in most cases the basis on which the loan may have been offered. The ILC’s observation was also relied upon by the Supreme Court in the State Bank of India v V Ramakrishnan & Ors case, albeit in the context of section 14 of the code, while arriving at the decision that a moratorium on a corporate debtor should not constitute a bar to the institution of proceedings against the personal guarantor.

The decision in the Piramal case, therefore, appears to be contrary to the cardinal principles of guarantees. Pursuant to this decision, the lenders seeking remedies under the code will now have to make a choice between the debtor and the guarantor. Further, the decisions where tribunals have allowed simultaneous proceedings are now open to challenge.

Simultaneous insolvency proceedings against the borrower and guarantor may result in complications especially where the CIRP of one of the parties is concluded while the other is still pending. To address these concerns, a framework for the consolidation of proceedings is needed. Denying the lender, the right to pursue simultaneous remedies may not be the answer.

Source: India Business Law Journal