1/9/2020 0 Comments Key Highlights of Protective Provisions to Stressed-Asset Buyers Under IBC (Second Amendment) Bill, 2019 Published by Taxmann Publications in 'Sebi & Corporate Laws' Journal [2019] 112 taxmann.com 286 (Article) Date of Publishing: December 17, 2019 On Thursday, 12th December, 2019, the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 was introduced in the Lok Sabha and the Bill, inter-alia, introduces many new provisions, most importantly the provisions which accord protection to stressed-asset buyers and also enhances the limit for home-buyers and debenture-holders (treated as financial creditors) for initiating corporate insolvency resolution process (CIRP) and this provision is proposed to be given retrospective effect. The intent of the IBC Second Amendment Bill aims at removing the difficulties and hurdles being faced by the new stressed-asset buyers and to make acquisition of the stressed-assets through CIRP more attractive to the investors. This article is an attempt to highlight only some of the key provisions of the Second Amendment Bill and it is expected to enlighten the professionals about the implication of the proposed amendments. While introducing the IBC Second Amendment Bill 2019, the Union Finance Minister reiterated the statement of objects and reasons for the Insolvency and Bankruptcy Code, 2016 (the Code) which was enacted with a view to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. Need for the IBC Second Amendment Bill 2019 As highlighted at the time of introduction of the IBC 2nd Amendment Bill 2019, Union Finance Minister stated that a need was felt to give the highest priority in repayment to last mile funding to corporate debtors to prevent insolvency, in case the company goes into corporate insolvency resolution process or liquidation, to prevent potential abuse of the Code by certain classes of financial creditors, to provide immunity against prosecution of the corporate debtor and action against the property of the corporate debtor and the successful resolution applicant, subject to fulfilment of certain conditions, and in order to fill the critical gaps in the corporate insolvency framework. Protection accorded to acquirer of stressed-assets under IBC The IBC 2nd Amendment Bill 2019 proposes to introduce a new section, namely Section 32A so as to provide that the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease under certain circumstances enumerated therein. Sub-Section (1) of the proposed Section 32A reads as under: "After section 32 of the principal Act, the following section shall be inserted, namely:-- "32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not-- (a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or (b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court: Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled: Provided further that every person who was a "designated partner" as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008, an "officer who is in default", as defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner incharge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor's liability has ceased under this sub-section." Therefore, as can be seen from the aforesaid, while the new acquirer of stressed-asset gets protection from prosecutions launched against the corporate debtor, the said protection does not extend to the erstwhile promoters, directors, key managerial personnel, associates or related parties of the erstwhile promoters of the corporate debtor who were directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority. It is also pertinent to mention that sub-section (2) of the proposed Section 32A which is being introduced, clearly specifies that "no action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31." The aforesaid immunity to the corporate debtor under Section 32A(1) and to the properties of the corporate debtor under Section 32A(2) is applicable only in respect of the approved resolution plan under Section 31 of the IBC or sale of liquidation assets under the provisions of Chapter III of Part II of the IBC which results in a change of control of the corporate debtor to a person who was not (a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or (b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court. In this connection, it is relevant to note that the aforesaid proposed changes in the IBC do not dilute or exempt the liability of the erstwhile director or partner of the corporate debtor, as the case may be, as per Section 66 of the IBC, who was involved in fraudulent trading or wrongful trading or who knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a CIRP in respect of such corporate debtor and who did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. On an application made by the resolution professional during CIRP, the Adjudicating Authority may by an order direct that such a person shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit. Even though this is a very important provision available to the Resolution Professional during CIRP, yet it is rarely used, which could have deterred economic offenders. Interestingly, Explanation (ii) to the proposed Section 32A(2) clarifies that nothing prevents from initiating action against the property of any person other than the corporate debtor or a person who has acquired such property through corporate insolvency resolution process or liquidation process under this Code and fulfils the requirements specified in this section, against whom such an action may be taken under such law as may be applicable. Proposed sub-section (3) of Section 32A mandates that notwithstanding the immunity given in this section, the corporate debtor and any person who may be required to provide assistance under such law as may be applicable to such corporate debtor or person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the corporate insolvency resolution process. In this connection, it is relevant to note that the aforesaid proposed changes in the IBC do not dilute or exempt the liability of the erstwhile director or partner of the corporate debtor, as the case may be, as per Section 66 of the IBC, who was involved in fraudulent trading or wrongful trading or who knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a CIRP in respect of such corporate debtor and who did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. On an application made by the resolution professional during CIRP, the Adjudicating Authority may by an order direct that such a person shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit. However, it may be important to highlight that the immunity granted under Section 32A of the IBC Amendment Bill is likely to create problems for the investigating agencies like Serious Fraud Investigation Office (SFIO), Enforcement Directorate (ED), Central Bureau of Investigation (CBI), prosecuting agency of the Ministry of Corporate Affairs and may delay completion of the prosecution of such offenders till the aforesaid immunity provisions get tested in the Courts of law and the critical issues get settled. Enhancement of Minimum Threshold for Certain Financial Creditors to Initiate CIRP As per the existing Section 7 of the IBC, a financial creditor, either by itself or jointly with other financial creditors or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. The IBC 2nd Amendment Bill 2019 proposes to enhance the threshold limit for initiating CIRP by certain classes of financial creditors and new provisos are being inserted in sub-section (1) of the existing Section 7 of the IBC. Basically, the first proviso proposed to be inserted deal with such class of financial creditors as referred to in clauses (a) and (b) of sub-section (6A) of Section 21 of the IBC and in respect thereof, an application for initiating corporate insolvency resolution process shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less. The next proviso proposed to be inserted in Section 7 of the IBC relates to financial creditors who are allottees under a real estate project and states that an application for initiating corporate insolvency resolution process shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent of the total number of such allottees under the same real estate project, whichever is less. The Bill further clarifies that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2019, such application shall be modified to comply with the requirements of the first and second provisos within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission. This change is proposed to be made applicable retrospectively and may face some legal objections from affected quarters. Going-Concern Basis of Corporate Debtor During CIRP – Extension of Licences, Permits, etc. Another significant amendment introduced in the IBC 2nd Amendment Bill 2019 relates to the facilitating the operation of the corporate debtor as a "going concern" during the CIRP. The Bill proposes to insert the following 'Explanation'to the sub-section (1) of Section 14 of the Code "For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period" Also, after sub-section (2) of Section 14, the following new sub-section is proposed to be inserted, namely: "(2A) The supply of goods or services that the interim resolution professional or resolution professional, as the case may be, considers critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except if such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified." Conclusion While upholding the constitutional validity of the IBC, the Supreme Court of India in Swiss Ribbons v. Union of India [2019] 101 Taxmann.com 389/152SCL365 has stated that the IBC is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. The experiment contained by the Code judged by the generality of its provisions and not by the so-called crudities and inequities have passed Constitutional muster. In the working of the Code, the flow of financial resources to the commercial sector in India has increased exponentially as a result of financial debts being repaid. The experiment conducted in enacting the Code is proving to be largely successful. The defaulter's paradise is lost. In its place economy's rightful position has been regained. The proposed amendment in the IBC 2nd Amendment Bill 2019 is in the right direction to facilitate the Government's keenness to promote ease in doing business in India and also helps in removing certain bottlenecks in sale/change of hands in respect of the stressed-assets and also to streamline initiation of CIRP in respect of real estate companies. The changes proposed are definitely a welcome move which augurs well for the Indian business scenario. ■■
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Author@Delep Goswami, F.C.S., Advocate; Archives
November 2021
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