Background

The Insolvency and Bankruptcy Code, 2016 was enacted to consolidate insolvency related laws and provide a time bound process to resolve insolvency among companies and individuals.

The Insolvency and Bankruptcy Code (Amendment) Bill, 2017  amends the Insolvency and Bankruptcy Code, 2016 and replaces an Ordinance promulgated in November, 2017. The code provides a time bound process to resolve insolvency of companies and individuals. Whereas compared to process under the 2016 code upon default, the insolvency professional manages the defaulter’s assets and constitutes a creditors committee.

Creditors committee decides to either: i) approve a resolution plan to restructure the defaulter’s loans, or ii) liquidate (sell) its assets to recover the outstanding amount. If no decision is taken within 180 days (extendable by 90 days), the defaulter’s assets will be liquidated.

“The Bill prohibits certain persons from submitting a resolution plan in case of defaults. These include: (i) wilful defaulters, (ii) promoters or management of the company if it has an outstanding non-performing debt for over a year, and (iii) disqualified directors, among others. Further, it bars the sale of property of a defaulter to such persons during liquidation.”

Main Features

The Bill amends provisions related to corporate default to prohibit: (i) certain persons from submitting resolution plans, and (ii) sale of the defaulter’s assets to such persons in case of liquidation. A resolution plan contains details which include: (i) the manner of repaying debts of the defaulting company, and (ii) management of the company after the resolution plan is approved.

• Resolution applicant: Under the Code, any person submitting a resolution plan to an IP is known as a resolution applicant. These applicants may include lenders or investors, among other persons. The Bill amends this provision to specify that a resolution applicant may submit a plan only on being invited by the IP.
• Who is barred as per the amended code?  Any persons under the below categories are prohibited from submitting a plan if: 

• Approving resolution plan: The Bill prohibits the committee of creditors from approving a resolution plan submitted before the Ordinance was promulgated, if the plan was submitted by a person ineligible to be a resolution applicant.
• Liquidation: The Code allows the IP to sell the property of the defaulter in case of liquidation. The Bill prohibits the sale of this property to any person ineligible to be a resolution applicant.
• Penalties: The Bill inserts a provision to specify that a person contravening any provisions of the Code, for which no penalty has been specified, will be punishable with a fine ranging between one lakh rupees to two crore rupees.

Brief Analysis on Effectiveness of Amendments

Excluding persons from the process may reduce competition among applicants for the defaulting firm

The Bill prohibits certain persons from submitting a resolution plan for resolving a defaulting company. One argument to exclude such persons may be that these people have not complied with laws in the past, and therefore could be undesirable candidates to restructure a failing company. Further, promoters and management of a defaulting firm may have been responsible for its failure and it may be improper to allow them to regain control of the company.

However, on the other hand excluding certain people (including persons related to the promoters or management) may result in lower competition among applicants seeking to resolve a company, which may lead to lower recoveries for creditors. Further, in case of some small and medium enterprises, the promoter may be the only person submitting a plan to revive the company. In such cases, the defaulting firm will go into liquidation even if there could have been a viable resolution plan.

Rationale for barring certain persons from the liquidation process unclear

In case of liquidation, the Bill prohibits the liquidator from selling the assets of the company to any person ineligible to submit a resolution plan. Unlike a resolution, after liquidation the company ceases to exist. Therefore, the background of the person bidding for its assets may not be relevant. Excluding some prospective bidders from the liquidation process may lead to lower recovery from the sale of the assets. On the other hand, it could be argued that certain promoters may deliberately run down the company to buy its assets at a lower price, and therefore there may be reason to exclude them from the liquidation process.

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Acquisory News Chronicle - December 2017