Amended IBC sets threshold for initiating corporate insolvency cases

The government has proposed at least 100 individuals or 10 per cent of creditors such as homebuyers have to come together to initiate corporate insolvency proceedings under the amendments to the Insolvency and Bankruptcy Code (IBC).

Adding a clause to Section 7 of the IBC, the IBC Amendment Bill, tabled in the Lok Sabha on Thursday, has proposed to make this change retrospectively.  It seeks to give 30 days for cases where a single homebuyer has taken a company to insolvency to comply with the revised criteria from the time of the commencement of the Act.

The proposed threshold will be applicable in all cases where a financial debt is owed to a class of creditors or is in the form of securities or deposits, and provides for appointing a trustee or agent to act as authorised representative for all the financial creditors.

“Overall the theme of the amendments proposed in the IBC is to remove the hurdles being faced and to make it more attractive for investors,” said Manoj Kumar, partner, Corporate Professionals.

The government has not, however, as demanded by industry bodies, yet announced an increase in the overall threshold for a company — currently Rs 1 lakh — to be admitted to the corporate insolvency resolution process.

The IBC has taken a big step in providing a clean slate to buyers of stressed companies by barring criminal proceedings such as attachment, seizure, or retention of property of such companies for offences committed before the initiation of insolvency proceedings.

The Amendment Bill has introduced clause 32A in this regard: “Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force … The corporate debtor (company undergoing insolvency) shall not be prosecuted for such an offence from the date the resolution plan is approved.”

Anshul Jain, partner, PwC India, said: “While this will be a great reprieve to successful bidders, the IBC itself cannot fix this issue … Other laws have to be amended accordingly to make the intent of this amendment felt.”

Addressing the concerns of interim or rescue financiers, the Bill has also expanded their definition of “any financial debt raised by the resolution professional during the insolvency resolution process period” by adding “… and such other debt as may be notified”.

In its statement of objects and reasons, the Bill stated, “A need was felt to give highest priority in repayment to last mile funding to corporate debtors to prevent insolvency…in case the company does land in that situation — to prevent potential abuse of the Code by certain classes of financial creditors.”

The Bill, while adding an explanation in Section 14, which deals with moratorium, licences, registrations, or clearances given by the government, shall not be terminated due to insolvency, subject to the condition that there is no default in paying current dues arising out of the use of the licence during the moratorium period.

While some experts said most companies under the IBC would not benefit from the clause because they did not have sufficient funds to pay their current dues, other felt differently. “This will preclude the need to reapply for licences and permissions and save the successful resolution application a lot of management time and overhead,” said Uday Bhansali, president, financial advisory, Deloitte India.

The resolution professional has also been empowered in the Bill to continue to manage the stressed company even after the expiry of the corporate insolvency resolution period (CIRP), until an order approving the resolution plan or appointing a liquidator is passed. 

This had become an issue in the case of Essar Steel, where the CIRP continued way beyond the 330-day deadline. The resolution professional will be allowed to start insolvency proceedings against another corporate debtor to recover dues.

The Bill has also clarified that the insolvency commencement date will be treated as the date of admitting the CIRP application and the resolution professional will have to be appointed by the same date.

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