IBC Amendment Bill: More Powers To CoC, Extended Deadline And Other Changes Approved By Cabinet

The cabinet approved changes to the bankruptcy law that will, among other things, extend the deadline and provide the committee of creditors more power in distribution of claims.

The Insolvency and Bankruptcy Code Amendment Bill, 2019 will amend provisions of 2016 law and requires approval of both houses of Parliament. It’s aimed at fixing gaps in the existing law and providing clarity in its implementation.

Here are the amendments suggested in the bill:

Resolution Plan

The amendment seeks to add clarity on the inclusion of alternative restructuring schemes such as mergers, demergers and amalgamations as part of the resolution plan. At present, the code mandates that a company may be rehabilitated within 270 days or face liquidation in absence of a resolution. The existing provisions in the code did not provide for inclusion of any alternative restructuring plan.

Extended Deadline

The bill proposes to extend the deadline for completing insolvency resolution from 270 days to 330 days, including the time spent in litigation or judicial process after the plan is admitted.

More Powers To CoC

The amendment proposes to enhance the powers of the Committee of Creditors by allowing it to decide how claims will be distributed on the basis of commercial consideration. Under the code, financial creditors have a priority over operational creditors in case of distribution under a resolution plan. As of now, there is no clarity on distribution to creditors other than the financial and operational creditors. The amendment will empower the CoC to decide distribution to such creditors on the basis of commercial consideration.

The insolvency code technically allows the flexibility of deciding the sharing pattern among stakeholders so long as the mandatory provision under the law is duly complied with, Ajay Shaw, partner in DSK Legal, told Bloomberg Quint.

“In case of operational creditors, there is a guarantee of a minimum amount being the liquidation value. The proposed amendment aims to ensure that Section 53 is not blanketly applied in resolution plans,” he said. “Therefore the intent is to clarify that the resolution process is based on the commercial consideration and discussion between the resolution applicant and the Committee of Creditors in a resolution process.”

Distribution Of Claims

The amendment proposes to equate distribution of amounts under a resolution plan with the manner it’s allowed in case of liquidation, maintaining the hierarchy of lenders. The change will be retrospective, making it applicable for ongoing cases.

The National Company Law Appellate Tribunal had ruled in the Essar Steel Ltd.’s case that the CoC had no role in distribution of claims, and brought lenders (financial creditors) and vendors (operational creditors) on a par.

This proposal in the amendment bill is intended to reiterate the position of creditors in a liquidation process under Section 53 of the code by giving a secured creditors higher priority over the unsecured and other operational creditors, Kumar Saurabh Singh, partner at Khaitan & Co., said. If the amendment is made retrospectively applicable, it may guide the Essar Steel case as well, he said.

The proposal aims to provide protection to dissenting financial creditors and operational creditors for a minimum value, Shaw said. Under the insolvency code, operational creditors don’t have a right to vote in the CoC meeting and, thus, the liquidation value under the waterfall model under Section 53 is a suitable parameter to protect the interest of operational creditors, he said. “The dissenting financial creditors do not approve a resolution plan as they are not happy with the sharing. In such case, interest of dissenting creditors must be protected at least to the extent of the amount that they may receive in case of liquidation.”

Voting By Lenders’ Trustees

The amendment aims to streamline voting by trustees appointed as representatives by financial creditors. The bill clarifies that votes by trustees under Section 21 (6a) shall be cast in accordance with the highest voting share of financial creditors on a present and voting basis.

The proposal seems to clarify the manner in which a trustee will act and vote on behalf of debenture holders who are part of committee of creditors, said Singh. “If a trustee has an approval of 50 percent or more of the debenture holders by value, he can vote at a CoC meeting on the basis of instructions given by the debenture holders.”

Makes Resolution Binding

The bill adds a clarification that a plan will be binding on all stakeholders including the central and any state government or a local authority which has dues from a corporate debtor.

Liquidation

The committee of creditors may take a decision to liquidate a corporate debtor at any time after the constitution of CoC and before preparation of information memorandum—a document prepared by a resolution professional with details and information about the formulation of a resolution plan.