Focus on amendments to India’s insolvency law

The Insolvency and Bankruptcy Code, 2016 has been amended by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which was recently passed by the nation’s parliament. Such frequent amendments do not indicate instability in Indian insolvency laws, but rather demonstrate the government’s commitment to remedy issues in implementation of the code that were identified by the Injeti Srinivas committee in its report submitted to the government on 26 March.

REDUCTION OF THRESHOLD

The Committee of Creditors (CoC) is responsible for deciding the outcome of an insolvency and may choose to accept a resolution plan or force liquidation. The CoC arrives at its decisions through voting, where the voting share of each committee member is determined on the basis of proportion of its debt in relation to the total debt.

Prior to the amendment, there was just one voting threshold of 75% of the voting share. However, the amendments propose two voting thresholds: (1) 66% for important matters such as approval of a resolution plan, deciding to liquidate, and appointment of a resolution professional; and (2) 51% for other matters.

This implies that even if financial creditors holding 34% voting share are opposed to a resolution plan, the financial creditors holding 66% of the voting share could still approve a resolution plan, and such plan could potentially provide a significantly reduced payout to the financial creditors holding 34% of the voting share. Even so, the reduction of the voting threshold is expected to ease the decision making process and avoid any deadlock leading to liquidation.

SHARDUL S SHROFF is executive chairman, and AMBARISH is a partner at Shardul Amarchand Mangaldas.