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The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017
June 7, 2019 / Others

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017

On Nov 23, 2017, the President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Code, 2016 (IBC) to strengthen the insolvency resolution process. The Ordinance amends the Insolvency and Bankruptcy Code, 2016 to prohibit certain people from submitting a resolution plan (specifying details of restructuring a defaulter’s debt). These persons include: (i) willful defaulters, (ii) disqualified directors, (iii) promoters or management of the defaulting company, and (iv) any person who has committed these activities abroad.  Below mentioned are some key amendments as per the Ordinance:

  1. Responsibilities of resolution professional
    While inviting prospective resolution applicants to submit a resolution plan, the insolvency professional is required to ensure that such applicant fulfills the requisite criteria laid by committee of creditors about the complexity and business operational scale of the corporate debtor.
  1. Non- eligible resolution applicants
    In order to eliminate possibility of default promoters of ailing entities from submitting resolution plans that leads to acquire the concerned entities assets at low valuations, henceforth any person whether acting alone or jointly with any person, who is a promoter or in the management or control of such person will not be eligible to submit a resolution plan.
  1. Position of personal guarantor
    The Ordinance clarifies the position of personal guarantor of the corporate debtor also. The Ordinance amends section 2 of the Code which deals with the applicability of the Code. The Ordinance inserted “personal guarantors to corporate debtor” in section 2 clause (e), meaning by the Code is now applicable to the personal guarantor of the corporate debtor. In consequence, it can be interpreted that now during the insolvency process, the moratorium under section14 of the Code will be applicable to the properties of the personal guarantor of the corporate guarantor also.
  1. Submission of resolution plan
    While considering an approval of a resolution plan, the Ordinance mandates the committee of creditors in order to consider the feasibility and validity of the plan. Moreover, a resolution plan submitted before the commencement of the present Ordinance by a resolution applicant who is otherwise ineligible under the IBC, unapproved by the committee of creditors, therefore requiring invitation of fresh resolution plans.

It would be important to mention that prior to the Ordinance, the Insolvency and Bankruptcy Board of India had vide its notification dated 7th November 2017 inserted new regulation after sub-regulation (2) under Regulation 38 in Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate persons) Regulation, 2017. Under the New Regulation, the Board has made mandatory that the resolution plan should contain details of the resolution applicant and other connected persons. The ‘details’ includes identity, conviction of any offence, if any, during the preceding five years, identification as willful defaulter, if any, by any bank or financial institution or consortium, etc. Now, after the present amendment in the Code by way of the Ordinance both the Code and Regulations are harmonious. The outcome of this will be that the probability of successful resolution of the corporate debtor will be on higher side as the corporate debtor will be handed to person/entity with clean background. The Ordinance prohibits certain persons from submitting resolution plans as it may be considered undesirable to let them take charge of the company.  However, this may reduce competition among applicants seeking to resolve the company and result in lower recoveries for creditors.

If you have any questions or would like to discuss more about the Code, our experts can ensure right business insights and best practices for you.

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The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018

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