The Insolvency and Bankruptcy Code, 2016 is about to witness significant amendments, if the government of India accepts the recommendations of the Insolvency Law Committee. The committee was constituted by the Ministry of Corporate Affairs to examine issues arising from implementation of the code, and it submitted its report on 26 March 2018.
The recommendations of the committee are wide-sweeping and extend from revisions to voting thresholds and disqualification criteria under section 29A of the code, to recommendations regarding treatment of homebuyers when a builder faces insolvency proceedings. They are summarized below.
Amendments to section 29A
Section 29A was introduced on 23 November 2017 through an ordinance, and has been a subject of scrutiny and litigation, specifically regarding the wide ambit of disqualifications.
The report recommends several amendments to section 29A to limit the scope of disqualifications, including: (1) deletion of reference to “any other person acting jointly or in concert with such person”; (2) exempting financial entities such as funds, asset reconstruction companies etc., from disqualification if they hold non-performing assets; and (3) exempting a financial entity from being disqualified if it has become a related party due to conversion of debt into equity in the past.
The amendments are expected to widen the pool of resolution applicants and result in increased competition.
Homebuyers as creditors
The position of persons who have paid significant amounts to builder companies facing insolvency has been a matter of national concern, with the Supreme Court of India also being involved. The report recommends that homebuyers should be classified as “financial creditors”, as their payments have the commercial effect of borrowing. This will allow homebuyers to become members of the Committee of Creditors (CoC). The report also suggests a system of representation and voting where the CoC comprises a large number of members.
Homebuyers will be better placed as members of the CoC, and will be able to voice their opinion and also collectively approve or reject a resolution plan, depending on their voting share.
Reduction in COC thresholds
The committee has recommended that the voting threshold for decisions taken by the CoC be brought down from 75% of the voting share of financial creditors to 66% for critical decisions such as approval of the resolution plan and passing a resolution for liquidation, and 51% for routine decisions. This will be helpful for the functioning of the CoC, and delays in the insolvency resolution process due to not having the requisite majority can be done away with.
1 year for obtaining approvals
The committee has recommended that a period of one year from the date of approval of the resolution plan by the National Company Law Tribunal (NCLT, the adjudicating authority under the code) be provided for resolution applicants to obtain all requisite approvals for implementing their resolution plans, unless a longer timeline is prescribed under the relevant regulations.
A shorter period has been provided for obtaining the approval of the competition commission of India for specified combinations, i.e. 30 days from the filing of a notice of combination by the resolution applicant. This will ensure that there are no delays in the mandatory 180-day period prescribed in the code for insolvency resolution (extendable once by another 90 days) on account of delays in receipt of regulatory approvals.
Personal guarantors excluded
Putting to rest the considerable confusion on the applicability of the moratorium under the Code to personal or corporate guarantees issued by the promoters of the corporate debtor, the committee has recommended that a clarification be included in the code to specify that the moratorium will not extend to guarantees issued by third-party guarantors of debts of the corporate debtor. This issue is also being examined by the Supreme Court.
Withdrawing post settlement
The committee has recommended that an application to the NCLT for initiation of insolvency proceedings be allowed to be withdrawn, even post admission of such application, if the CoC approves the withdrawal by a vote of 90%. This will ensure that if lenders are amenable to a settlement, insolvency proceedings and potential liquidation can be avoided for a corporate debtor, which can then be revived post settlement.
The efforts of the government in establishing the committee to review the implementation of a nascent law is laudable, and demonstrates a commitment to improve the implementation of the code. Such reviews will be needed on a periodic basis as new issues may arise from implementation of the code as more companies face insolvency proceedings.
Shardul S Shroff is executive chairman, Ambarish is a principal associate, and Roma Das is an associate at Shardul Amarchand Mangaldas
Amarchand Towers, 216 Okhla Industrial Estate
Phase III, New Delhi, 110020, India