Proposed changes to IBC may augur well, but apprehensions still remain

Proposed amendments to the Insolvency and Bankruptcy Code (IBC), one of the most-reformed laws of recent times, have laid to rest most of the concerns, but apprehensions remain. 

From the days of Sick Industrial Companies Act of 1985 to the Securitization and Reconstruction of Financial Assets Act, 2002, the IBC has managed to take the learnings of all previous legislation to create a more holistic law. It addressed secured, unsecured as well as the operational creditors unlike any previous Act and also created a dedicated framework of regulator, adjudicators, and information utilities, leading to much better recovery for banks. 

Learnings from the past and present continue to make IBC a fast-evolving law. In its third year, IBC has managed to plug important gaps, but this is not the end of the road with issues coming to light at every turn.

“Fruit of the poisonous tree”

Companies taking over stressed assets can now carry on with business with the assurance that no criminal proceedings will befall them or the acquired asset for offences committed before the insolvency was initiated. Experts feel other laws such as the Prevention of Money Laundering Act need to be brought in line to make the change effective. Many such cases are still sub-judice where an investigation authority has attached properties of erring promoters even after approval of the resolution plan and courts are yet to deal with argument of “fruit of the poisonous tree.” 

“One must wait and see if the courts also share a similar view, especially in criminal cases where the properties of the insolvent company are alleged to have been created or acquired through embezzlement, money laundering, and other economic crimes,” said Anshul Jain, partner, PwC India. 

This amendment proposes that while the insolvent company and its assets are free from any proceeding, attachment, seizure, confiscation, etc, but the promoters shall continue to be liable to be prosecuted under applicable laws and the property of any such person shall also be subject to applicable proceedings. 

Some legal experts feel it could be contradictory to the recently introduced legislation for insolvency of personal guarantors of the insolvent companies. Assets of personal guarantors, who are also promoters, are not spared by the new amendment, which could pose a challenge for banks who want to initiate insolvency against such guarantors. “Financial creditors will not be able to recover any money from those guarantors if their properties are already subject to such criminal proceedings,” Jain said. 

Licence cannot be terminated

The Bill’s proposal that a licence or permit cannot be suspended or terminated on grounds of insolvency is being taken by many with a pinch of salt. The proposed change comes with the condition that there is no default in dues arising for the use or continuation of the said licence, permits, etc during the moratorium period. “The benefit of this clause is available to only those companies, which are able to generate sufficient cash flows in order to meet their current statutory dues...this would further diminish the value proposition for companies unable to meet such expenses or are closed down,” Jain said. 

The Supreme Court, in the recent SevenHills judgment, held that IBC cannot override the right of a local authority to control its properties that have been provided on lease to the insolvent company. The top court order came even after the IBC amendment that a resolution plan once approved is binding on the Centre, state government, and local authority. “Authorities can take advantage of the SC order and language of the IBC Bill and may terminate rights, licence, and permit,” Jain said.

Empowering RP

The resolution professional (RP) in the new Bill has been proposed to be given more powers. Most of them are likely to ease the functioning of the insolvent company during the moratorium period. RP could now initiate corporate insolvency against other companies to recover dues. To ensure continuity, the RP is proposed to be in charge of company's operation even beyond the expiry of resolution period till an order passing the plan is passed or a liquidator is appointed. 

An important change proposed in the Bill is in Section 14 where a new clause is to be inserted that would allow the RP to decide which services are critical to the operation of the company. Supply of such goods and services cannot be terminated, suspended, or interrupted during the moratorium, unless there are unpaid dues during that period. 

“On the new provision restricting invocation of ipso facto clauses by potential critical suppliers, Indian policy makers may have been inspired by the recent EU preventive restructuring frameworks directive of June 2019,” said Pratik Dutta, senior research fellow, Shardul Amarchand Mangaldas. 

According to regulation 32 for essential goods under the corporate insolvency resolution process, Section 14 (2) covers four items — electricity, water, telecommunications, and information technology. The insolvency law committee has proposed expanding the scope of “essential goods” definition under the Code to cover supply of basic requirements of a corporate debtor to continue production and remain a going concern. 

Some experts feel this could increase corruption as RPs could declare any service essential. “This amendment might encourage wealth transfer from solvent supplier companies like MSMEs by forcing such suppliers to make the financials of the insolvent company under IBC look better,” a legal expert said. 

The move, however, is expected to smoothen the processes for a company under insolvency and decentralise power from the regulator in a more hands-on approach by the RP who is dealing with the day-to-day matters of the company.

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