INSOLVENCY & BANKRUPTCY CODE – KEY AMENDMENTS

For RBI Grade B 2018 and NABARD Grade A and Grade B 2018

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 BACKGROUND

Passed by Lok Sabha & Rajya Sabha and became an act

Insolvency & Bankruptcy
after obtaining presidential assent on 18th January,
(Amendment) Bill, 2017
2018.

Insolvency and Bankruptcy

Recently promulgated on June 6, 2018 on
Code (Amendment) Ordinance,
recommendations of 14 member committee.
2018

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 GLANCE OF IMPORTANT AMENDMENTS

Persons ineligible to be resolution applicant

No sale of property to ineligible persons during liquidation

More clarity in penalty provisions & more powers to IBBI

Easing rules to enable promoters of MSME to bid for their companies

Bringing Homebuyers at Par with Financial Creditors

Changes in voting threshold to encourage resolution instead of liquidation

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Insolvency and Bankruptcy Code (IBC) (Amendment) Bill 2017

• The IBC Bill was passed by Lok Sabha on December 29, 2017 and
Rajya Sabha on January 2, 2018 and presidential assent was received
on January 18, 2018 (“Amendment Act”).

• The amendment primarily deals with insertion of new section

(Section 29A) in the insolvency code providing for persons ineligible
to be a Resolution Applicant.

• Several other enabling provisions have been inserted to smoothen

the insolvency resolution process.

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 OBJECTIVES OF THE AMENDMENT

(i) to facilitate phased implementation of the provisions for

corporate persons, individuals and partnership firms;

(ii) to provide clarity on persons who can submit a resolution plan;

(iii) to enable the resolution professional, with the approval of the

committee of creditors, to specify the eligibility conditions for
submission of resolution application etc.

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PERSONS INELIGIBLE TO BE RESOLUTION APPLICANT

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 Following persons will not be eligible for submitting a resolution plan
• he is an undischarged insolvent (individual unable to repay his debt),
• he is a willful defaulter,
• his account has been identified as a non-performing asset for more than a year and he
has not repaid the amount before submitting a plan,
• he has been convicted of an offence punishable with 2 or more years of imprisonment,
• he has been disqualified as a director under the Companies Act, 2013,
• he has been prohibited from trading in securities by SEBI,
• he is the promoter of company which indulged in fraudulent transactions,
• he has given guarantee on a liability of the defaulting company undergoing resolution
or liquidation and has not honoured the guarantee,
• he has indulged in these specified activities abroad, or
• he is connected to any person mentioned above.
The Bill exempts scheduled commercial banks, asset reconstruction companies and
alternate investment funds if they are connected to any such person.
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 Other Key Features

• The bill redefines resolution applicant mentioned in code as a person

who submits a resolution plan after receiving an invite by the
insolvency professional to do so.
• The bill amends provision related to eligibility in IBC to state that
insolvency professional will only invite those resolution applicants to
submit a plan who fulfill certain criteria.
• The bill bars the sale of property of a defaulter to such persons who
is ineligible to be a resolution applicant during liquidation.
• The Bill inserts provision to specify that person contravening any
provisions of IBC, for which no penalty has been specified, will be
punishable with fine ranging between Rs. 1 lakh to Rs. 2 crore.
• The Bill provides more power to Insolvency & Bankruptcy Board of
India for making regulations under the law.
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 RATIONALE OF THE AMENDMENT
• This was needed to prevent the back-door entry of errant promoters
into the company, thereby taking advantage of the haircuts and thus
getting a premium for their own wrongdoings.
• It seeks to strike balance in trade-off between punishing wilful
defaulters and ensuring a more effective insolvency process.
• The bill allows defaulting promoters to be part of the debt resolution
process, provided they repay dues in specified time to make their
loan account operation.
• It is expected to bar people who enter into backdoor arrangements
with corporate debtors formally or informally, directly or indirectly,
from bidding for insolvent companies by bringing them within the
scope of the definition of connected people.
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 RATIONALE OF THE AMENDMENT
• This was needed to prevent the back-door entry of errant promoters
into the company, thereby taking advantage of the haircuts and thus
getting a premium for their own wrongdoings.
• It seeks to strike balance in trade-off between punishing wilful
defaulters and ensuring a more effective insolvency process.
• The bill allows defaulting promoters to be part of the debt resolution
process, provided they repay dues in specified time to make their
loan account operation.
• It is expected to bar people who enter into backdoor arrangements
with corporate debtors formally or informally, directly or indirectly,
from bidding for insolvent companies by bringing them within the
scope of the definition of connected people.
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COMMITTEE TO EXAMINE CHANGES IN IBC

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 COMMITTEE TO EXAMINE CHANGES IN IBC
• With the implementation of IBC, several issues had been thrown up
• and government set up a 14-member high-level committee chaired
by ministry of corporate affairs secretary Injeti Srinivas to suggest
changes.
• Insolvency and Bankruptcy Board of India (IBBI) Chairperson M S
Sahoo, RBI Executive Director Sudarshan Sen, former Lok Sabha
Speaker T K Viswanathan are among the panel members.
• The government recently placed the report of the 14-member
insolvency law committee, chaired by ministry of corporate affairs
secretary Injeti Srinivas, in public domain.
• On the basis of its recommendations, Insolvency and Bankruptcy
Code (Amendment) Ordinance, 2018 has been promulgated.
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 IMPORTANT RECOMMENDATIONS

• Treating home buyers as financial creditors will let them take

defaulting builders to bankruptcy court.
• Letting lenders to decide on turnaround scheme or liquidation by 66%
vote, down from 75%, to speed up decision making.
• Redefining persons disqualified from bidding for bankrupt firm will
widen the pool of bidders.
• Promoters of bankrupt small businesses should be allowed to bid
for the firm if they are not wilful defaulters.
• Rules for interim finance to bankrupt firm will boost market for
stressed assets.
• Lenders’ action against guarantors to bankrupt firms will not be
barred.

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 Insolvency and Bankruptcy Code Amendment (Ordinance) 2018

• The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018

was promulgated on June 6, 2018.

• It amends the Insolvency and Bankruptcy Code, 2016.

• Ordinance bring much needed clarity and allays some of the

apprehensions regarding insolvency resolutions that had surfaced
since the implementation of the code.

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Insolvency and Bankruptcy Code Amendment (Ordinance) 2018

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Homebuyers at Par with Financial Creditors

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 Homebuyers at Par with Financial Creditors

• The ordinance proposes to bring homebuyers on par with financial

creditors, which will ensure they get their homes or dues when a
developer becomes insolvent.
• Under the IBC, creditors are classified as operational and financial
creditors.
• Both of them have different rights under the code.
• Financial creditors are a part of the committee of creditors, which is
responsible for taking key decisions related to the resolution.
• Homebuyers will get representation on the committee of creditors
and the advance given by them to the builder will be considered
credit.

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Changes in Voting Structure

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 Changes in Voting Structure

• The Code specifies that all decisions of the committee of creditors be

taken by a majority of at least 75% of the financial creditors.
• The Ordinance lowers this threshold to 51%.
• For certain decisions of the committee, the voting threshold has
been reduced from 75% to 66%.
• These include:
(i) appointment and replacement of the resolution professional,
(ii) approval of the resolution plan, and
(iii) approval of certain actions of the resolution professional during
the insolvency resolution process.

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Special Dispensation for MSMEs

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 Special Dispensation for MSMEs

• The first ordinance had Introduced Section 29A in the IBC, which
barred many people and entities from bidding for companies
undergoing resolution.
• It included promoters with recognised non-performing assets against
their names.
• Under the proposed change, promoters and managers or guarantors
to creditors of MSMEs undergoing resolution would be able to bid
for their companies, except in the case of proven wilful default.
• This was done because there was very little outside interest in
MSMEs.
• This measure would ensure faster resolution of MSME cases.

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 Representative of Financial Creditors

• The Ordinance allows the financial creditors to appoint authorised

representatives in certain cases, such as when the debt is in the form
of securities or deposits.

• These representatives will participate and vote in the committee of

creditors as per the prior instructions received from the creditors.

• If a creditor does not give prior instructions, then the representative

will abstain from voting.

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Ineligibility to be Resolution Applicant

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 Ineligibility to be Resolution Applicant

• The Ordinance amends the criteria which prohibits certain persons

from submitting a resolution plan.

• For example, the Code prohibits a person from being a resolution

applicant if he has been convicted of an offence punishable with two
or more years of imprisonment.

• Under the Ordinance, this provision will be applicable only for certain
specified offences, and will not apply after two years from the date of
his release from imprisonment.

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 Ineligibility to be Resolution Applicant
• The Code prohibits a person from being a resolution applicant if his
account has been identified as a non-performing asset (NPA) for
more than a year.
• The Ordinance provides that this criterion will not apply if such
applicant is a financial entity, and is not a related party to the debtor
(with certain exceptions).
• The Code also bars a person from submitting a plan, if he has
executed an enforceable guarantee in favour of a person who is a
creditor to a defaulter undergoing a resolution process.
• The Ordinance amends this provision to specify that such a bar will
apply if such guarantee has been invoked by the creditor and
remains unpaid.
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 OTHER KEY FEATURES
• The Ordinance provides that for a corporate applicant to initiate an
insolvency resolution process, they will have to submit a special
resolution passed by at least three-fourth of the total number of
partners of the corporate debtor.

• A resolution applicant may withdraw an application, filed to initiate

an insolvency resolution process, from the National Company Law
Tribunal (NCLT) if approved by a 90% vote of the committee of
creditors.

• The Ordinance specifies that NCLT must ensure that a resolution plan
has provisions for effective implementation, before approving it.
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ISSUES & CONCERNS

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 ISSUES & CONCERNS

• There is still no clarity whether home buyers would be secured

creditors or unsecured creditors.
• If home buyers are treated as secured creditors, there is also an issue
of 'haircuts’.
• There will be an issue of defining the micro, small and medium
enterprises.
• The government has though recently changed the classification
norms of MSME to turnover basis but many existing loans are
classified in the banks' book as MSMEs based on the investment in
plants and machineries.

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INSOLVENCY & BANKRUPTCY CODE – KEY
AMENDMENTS

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Thank You! Happy Learning!

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