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.”
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
- 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
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.
Read more at:
Acquisory News Chronicle
- December 2017