Cabinet Approves Amendments To Streamline Insolvency And Bankruptcy Code

The Union Cabinet has approved a second amendment to the Insolvency and Bankruptcy Code, 2016, that seeks to streamline the corporate insolvency resolution process and protect a successful resolution applicant from criminal proceedings against offences committed by previous managements or promoters of a corporate debtor.

The government has been amending the code in tandem with new developments and the problems arising in its implementation. The proposed amendment comes after the government had amended the code in August this year. The bill, which is yet to be tabled in the Parliament, will become a law after receiving approval from both of its houses and receiving Presidential assent.

Here are the key proposals of the bill:

Proposed Amendments

The Insolvency and Bankruptcy Code has been facing operational difficulties since its passage in 2016. The government has responded by making timely amendments in the code. As per a government notification, the amendments seek to:

• Streamline the implementation of corporate insolvency resolution process and protect last-mile funding to boost investments.
• Introduce additional threshold for triggering of CIRP by certain categories of financial creditors who are represented by an authorized representative. This, the bill states, will help in preventing frivolous CIRP.

Ring-Fencing Against Criminal Proceedings

Criminal proceedings against offences committed by past managements or promoters of a company undergoing insolvency resolution can affect the success of a resolution plan. The code in its present form is silent about the impact of past managements’ offences on a corporate debtor after emerging from a resolution process.

For instance, JSW Steel Ltd. had to approach the National Company Law Tribunal to seek extinguishment of all present and future liabilities on account of criminal investigations against Bhushan Power and Steel, contending that an absence of any such protection would jeopardise the feasibility and viability of its resolution plan.

The amendment proposes to address this shortcoming by ring-fencing a corporate debtor after its resolution from criminal proceedings arising from offences committed by the previous management. This amendment, according to experts, will remove the obstacle in successful resolution of a corporate debtor.

Prohibiting Cancellation Or Termination of Licenses And Permits

Companies rely on licences, permits and clearances granted by the government or a regulatory body to operate in a regulated sector. Such permits and clearances are subject to periodic compliances, failing which, the regulator cancels or revokes such licences. For instance, telecom companies rely on spectrum and telecom licences granted by the Telecom Regulatory Authority of India, while aviation companies require necessary approvals from the Directorate General of Civil Aviation.

Any cancellation, suspension or non renewal of such license or permit can derail the resolution process of a corporate debtor. Recently the Mumbai Bench of the NCLT rejected the telecom department’s move to cancel Aircel’s telecom licence as it could derail its recovery process.

The proposed amendment seeks to ensure that a corporate debtor continues as a going concern. It aims to do so by an amendment in the Code to clarify that the licenses, permits etc. cannot be terminated or suspended during the moratorium period. Experts told BloombergQuint that this will help those ailing sectors that rely on permits and licenses.

Besides this, the Bill seeks to amend provisions relating to insolvency commencement date and powers of central government to notify financial service providers.