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Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018

  • 24 Jul 2018
  • 6 min read

The government has introduced the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018 in the Lok Sabha.

  • The bill replaces the Ordinance on the same, which was approved and promulgated in June, 2018.
  • The bill brings about significant changes to improve the insolvency resolution framework in the country.
  • The changes are based on suggestions made by a 14-member Insolvency Law Committee chaired by Corporate Affairs Secretary Injeti Srinivas.
  • The Insolvency and Bankruptcy Code (IBC) was initially introduced in 2016 when the banking sector was going through a serious crisis because of indiscriminate lending by banks between 2008-2014. The debt recovery laws prevailing at that time were weak and hence loan recoveries could not be made from big industrialists.

Key Provisions

  • Recognises homebuyers as financial creditors - thus giving them due representation in the Committee of Creditors (CoC) and making them an integral part of the decision-making process.

Committee of Creditors (CoC)

  • The CoC is comprised of all financial creditors of the corporate debtor.
  • The voting share in the CoC is proportionate to the extent of financial debts owed to such creditor.
  • Further, home buyers would be able to invoke Section 7 of the IBC against errant developers. (Section 7 allows financial creditors to file application seeking the insolvency resolution process.)
  • Reduces the minimum voting threshold for the CoC to 66%, from 75% for key decisions. For routine decisions, the voting threshold is fixed at 51%.
  • Assent of the Competition Commission of India (CCI) will be needed before the Committee of Creditors (CoC) finalises a resolution plan. Currently, the winning bidder approaches CCI for clearance before formally taking over the asset.
  • Allows promoters of micro, small and medium enterprises (MSMEs) to bid for their companies in any insolvency process. It also empowers the Centre, in public interest, to exempt MSMEs from the application of any other provisions of the Code.
  • Corporate houses can bid for multiple distressed assets under the insolvency process without getting themselves disqualified under Section 29A of IBC. (Section 29A specifies the parties ineligible to be a resolution applicant.)
  • The bill 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 his account has been identified as a non-performing asset (NPA) for more than a year. However, the bill provides that pure-play financial entities (pure-play refers to a publicly traded company that is focused on only one industry or product) like banks would be exempted from this disqualification provision on account of holding stake in or acquiring stressed firms under the IBC, 2016. A grace period of three-years has been provided from the date of such acquisition.
  • The amendments allow the promoter to bid for his enterprise undergoing Corporate Insolvency Resolution Process (CIRP) provided he is not a wilful defaulter and does not attract other disqualifications not related to default. 
  • Insertion of a new section - Section 12A - that permits the withdrawal of application admitted for initiation of insolvency resolution process to the National Company Law Tribunal. Such withdrawal would be permissible only with the approval of the CoC with 90% of the voting share voting in favour.
  • The Insolvency and Bankruptcy Board of India’s (IBBI) will be given a “developmental” role similar to other regulators such as IRDAI and PFRDA. It will also be given the power to regulate the working and practices of certain professionals under the IBC.
  • The Limitation Act 1963 will apply to the proceedings or appeals under the IBC.

Impact

  • The move is likely to enable homebuyers to take builders defaulting on their obligations to a bankruptcy court and decide their future along with their lenders’.
  • At a time when many homebuyers are facing hardships on account of delayed and incomplete real estate projects, this will infuse confidence in the homebuyers to invest their money - helping revive the stagnant real estate market.
  • By allowing MSME promoters to submit their resolution plan in insolvency cases, it will also help MSMEs sector - which is key to job growth in India.
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