The IBC In 2019

Not only has the 2019 Amendment closed the loop on a lot of open/contentious issues, it will be remembered as an example of swift action on the part of the legislature in protecting the basic tenets of the law...

Since its enactment in 2016, the Insolvency and Bankruptcy Code, 2016 ("IBC") has seen multiple challenges. Right from timelines and categorization of creditors to the role of the committee of creditors and tribunals, each of its key elements have faced judicial scrutiny. However, the design of the IBC and the research and groundwork behind various amendments has been robust and as a result, the courts have upheld the fundamental tenets of the IBC. While dealing with new issues sprouting over a large number of corporate insolvency resolution processes, words, perceptions and interpretations of the IBC have evolved. However, the spirit of the law has only been reinforced. The most recent example of ensuring that vital elements of the IBC continue to exist as contemplated by the architects of the law, is the Insolvency and Bankruptcy Code (Amendment) Act, 2019 ("2019 Amendment").

This amendment of the IBC primarily reaffirms the importance of: timely resolution of firms and protection of interests of all stakeholders. It further provides flexibility to resolution applicants in terms of devising means of resolving distressed companies and provides clarity on the voting process when dealing with a class of creditors in the committee of creditors. Each of these are important issues which have plagued the IBC regime in recent times. In this article, I highlight the key features of the 2019 Amendment and provide an overview of its implication on the market.

Expeditious resolution of firms was a vital element of the 2016 insolvency reform. However, the mandatory nature of timelines specified in the IBC was diluted over time. Increasing litigation in the IBC regime and a dire need for capacity building at the National Company Law Tribunals ("NCLTs") were the driving forces leading to delays in timelines. To deal with this issue and revive the true intent of the IBC, the legislature has been very careful in its approach this time. It has acknowledged the prevalence of litigation and has, first, increased the timeline for resolution of firms from 270 days to a period of 330 days. It has then gone a step further and specifically used the word 'mandatorily' in the section specifying this timeline to keep all doubts and loopholes at bay. With respect to admission timelines, it seeks the recording of reasons when petitions under the IBC are not admitted / rejected within the stipulated period of 14 days. This move comes in light of recent additions to members and benches of the NCLTs, which should act as a catalyst in ensuring speedy resolution. It is also likely to prevent frivolous litigation and seeking of multiple adjournments in IBC cases.

In terms of protection of interests of all stakeholders in the IBC process, the amendment provides for specific payment requirements in resolution plans for dealing with claims of operational creditors, dissenting financial creditors and secured creditors. When dealing with the interests of operational creditors, the 2019 Amendment provides for payment of amounts which must not be less than higher of: (a) the value which would have been payable to such creditors on liquidation of the corporate debtor; or (b) the amount such operational creditors would have received in accordance with the priority specified in the liquidation waterfall under section 53 of the IBC.

Thereafter, for financial creditors who do not approve the successful resolution plan, the amendment provides for the payment of amounts which must not be less than the value which would have been payable to such creditors in case of liquidation. The amendment has also clarified that these two provisions shall have retrospective effect on all pending proceedings. A further bone of contention in most IBC proceedings has been the treatment of inter se priority rights among secured creditors. While the position in liquidation proceedings was clarified by the insolvency Law Committee in its report of March 2018, there was uncertainty as to the protection of such rights in the resolution. The 2019 Amendment has clarified this. It states that resolution plans may take into account the order of priority among secured creditors. 
Another challenge in IBC proceedings was clarity on the process of voting when the committee of creditors includes a class of creditors or holders of bonds, debentures, etc. Thus far, voting by an authorized representative on behalf of such creditors was provided to be on a passthrough basis – and the representative was required to vote on behalf of the financial creditors to the extent of the financial debt held by each financial creditor. The 2019 Amendment clarifies that an authorized representative (including a trustee, agent etc.), shall vote on behalf of all creditors represented by her as per the decision of more than 50% of the creditors who have cast their vote. Such majority vote within a class of creditors will be counted as a 100% vote from that class of creditors in favor of or against a voting item. Not only will this provision encourage increased participation in the voting process but will also provide clarity to an authorized representative tasked with aggregation of votes in case of a class of creditors who are large in number (for example real estate allottees).

Lastly, to widen the scope of the means and proposals for resolution, the 2019 Amendment clarifies that the resolution plan may adopt means such as merger, demerger and amalgamation for restructuring of the corporate debtor. In the past, there was difference in views in the market as to whether a resolution plan could provide for such means owing to the requirement in the IBC that a resolution plan must provide for resolution of the corporate as a going concern. This flexibility in resolution is likely to incentivize wider participation in resolution processes and better chances of resolution of firms.

As is evident from the above, the 2019 Amendment has closed the loop on a lot of open / contentious issues. In addition to resolving these issues, the 2019 Amendment will also be known as an example of swift action on the part of the legislature in protecting the basic tenets of the law. The first week of July 2019 saw an order of the National Company Law Appellate Tribunal in the case of Essar Steel Limited, which departed from widely accepted market norms when dealing with some of the issues discussed above. The Ministry of Finance is quoted to have initiated the 2019 Amendment to deal with the implications of this order of the appellate tribunal. The Bill proposing the 2019 Amendment was introduced in the Rajya Sabha on July 24, 2019, was passed by both Houses of Parliament by August 8, 2019, and has been notified with effect from August 16, 2019. Interactions with market participants have shown that this promptness of the legislature and the corresponding amendments have been welcomed in the market, especially by foreign investors. Foreign investors had started focusing on the Indian distressed asset market only post the enactment of the IBC. Such prompt action on the part of the legislature to ensure certainty of the law is seen most favorably by such market participants.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.