Impact of recent IBC(Insolvency & Bankruptcy Code) 2nd Amendments Bill 2020
The Insolvency and Bankruptcy code after its enactment in the year 2016 proved to be very handy in the resolution of stressed assets. As per an RBI report on Trend and Progress of Banking in India 2018-19, gross NPAs as a per cent of Gross Advances for all SCBs declined from 11.2% in 2017-18 to 9.1% in 2018-19 in which IBC proceedings contributed more than half of the total amount recovered. Also, the average time taken for the resolution came to 394 days, closer to the timeline of 330 days prescribed in the Code, down from 4.3 years under the previous regime.
The impact of this law was such that cases were drawn to a conclusion not only within NCLT(National Company Law Tribunal), but many cases were settled also before it could reach the adjudicating authority. It can safely be underlined that the experiment of IBC in Indian set up has been proving to be very useful gradually. However, with the passing of time, a need is being felt to change certain rules as well introduce new ones to smoothen the resolution proceedings and also save this law from misuse and disuse. The very recent second amendment bill passed in the parliament has also manifold implications. These changes are experience-driven and would help in setting up a robust IBC ecosystem.
Some of the few key changes made in the act in March 2020 and its benefits
A new section 32A has been inserted which protects the incoming corporate or promoter from criminal proceedings against offences committed by previous management or promoters. This law is aimed to provide protection to the successful resolution applicants against any kind of criminal proceeding in the aftermath of completion of the resolution process. Further, the condition speaks that such exclusion will be available to only such promoters who were not in the management or control of the corporate debtor or a related party of such a person; or a person with regard to whom the relevant investigating authority has reasons to believe that they abetted with the previous promoters in the wrongdoings of the corporate debtor undergoing resolution proceedings. It means that the exclusion is purely based on the successful revival of the
unit after insolvency proceedings. Also, this addition in the act has potentially enhanced the success rate of the resolution process as more promoters would now be interested in the process because they would not be having the fear of hidden legal burden from various statutes which is generally a cause of concern in sick units.
As per the recommendations of the Insolvency Law Committee, homebuyers have also been given significance as financial creditors. Being a financial creditor, they will be able to initiate the insolvency resolution process, to make claims in this process, and have the right to be a voting member of the committee of creditors that accepts or rejects a resolution plan. This amendment goes with a condition that the total number of homebuyers in such case should not be less than 100 or less than one-tenth of the project so as to ensure against the frivolous triggering of initiation of insolvency proceedings. This provision would address the woes of those buyers who are still waiting for either refund of their money or possession of the property is largely incomplete residential projects by the builders. Obviously, such buyers who do not fulfil the minimum quorum required to file insolvency proceedings would not loose other legal recourse altogether.
A vital amendment has been done in section 14 of the Code which provides that license, permit, registration, quota, concession, etc. given by Central Government, State Government or any statutory body shall not be suspended or terminated on the grounds of insolvency. This change has been effected to ensure uninterrupted execution of resolution plan and bringing in more confidence in the prospective bidders because statutory approvals are vital for rejuvenation of the viability of the unit and future success hinges on such approvals.
In the same section, it has also been provided that critical supplies cannot be terminated or suspended during the Moratorium period. The idea behind this amendment is to ensure continuity of the operation of the unit during resolution process as suppliers that are critical to the operation of the unit may stop supply to the unit subjected to insolvency proceedings resulting into complete closure of the operation of such units and a big question mark on its future resurrection. This amendment attracted criticism from the Standing Committee on Finance because most of the supplies are usually made by MSMEs and the intent behind this amendment may turn into a case of over-regulation of
suppliers, particularly MSME suppliers and in the hope of survival of a sick unit, MSME suppliers cannot be burdened with overly restrictive conditions. In future, more amendments could be seen on this front to further ensure the ease of doing business.
Section 11 of the Code has been amended and it has enabled the corporate debtor under insolvency resolution proceedings to initiate the same against other corporate debtors. This amendment has brought more transparency in the system and it is a welcoming step towards a healthy IBC regime.
The above amendments are purely consequential in nature which can also be determined by the recent announcement of the government of raising the threshold for invoking insolvency under the IBC from Rs.1 Lac to Rs.1 crore with a view to prevent triggering of such proceedings against small and medium enterprises that are facing currently the heat of Covid-19 pandemic. Further, insolvency proceedings against fresh defaulters would remain suspended for up to one year and COVID-19-related debt would be excluded from the definition of default. So, more such amendments may be witnessed in future.
It goes without saying that the Code has widely addressed the problem of Non- Performing Assets (NPAs). The key amendments as stated above would attract potential corporate by making the process more attractive and worth investing, it will also allay the fears of the cloud of legal uncertainty on successfully resolved cases, it will have a positive impact on the hair cut banks are taking in the resolution of the case thereby paving a way for a speedy and just resolution.
Vineet Kumar Das, Sr. Manager and Faculty at Public Sector Bank (email – [email protected])