INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2020 – AN OVERVIEW

[Mr. M. GOVINDARAJAN]

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (‘Act’ for short) got the assent the President of India on 13.03.2020 which amended certain provisions of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short).  The provisions contained in this Act came into force with effect from 28.12.2019.

Insolvency commencement date

The Act omits the proviso to section 5(12) of the Code.  After this amendment the expression ‘insolvency commencement date’ means the date of admission of an application for initiating corporate insolvency resolution process (‘CIRP’ for short) by the Adjudicating Authority under sections 7,  9 or section 10, as the case may be.

Amendment to Section 7

Section 7 of the Code provides for the initiation of CIRP by financial creditor. Section 7(1) of the Code provides that a financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority when a default has occurred.

The Act inserted three provisos to Section 7(1).  The first proviso provides that for the financial creditors, referred to section 21 (6A) (a) and (b), an application for initiating CIRP against the corporate debtor shall be filed jointly by not less than 100 of such creditors in the same class or not less than 10% of the total number of such creditors in the same class, whichever is less.

The second proviso provides that for financial creditors who are allottees under a real estate project, an application for initiating CIRP against the corporate debtor shall be filed jointly by not less than 100 of such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate project, whichever is less.  This proviso has been inserted at the request of stakeholders in the real estate sector.

The Act has been notified on 13.03.2020 and the provisions came into effect from 28.12.2019.  Therefore for the in between period the application for initiation of CIRP has to comply with first proviso or second proviso which could be possible only by means of modifying the application.

For this purpose the Act inserted the third proviso which provides that where an application for initiating the CIRP against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Act, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act.    If the said application is not modified, the application shall be deemed to be withdrawn before its admission.

Persons not entitled to make application

Section 11 of the Code provides that the following persons shall not be entitled to make an application to initiate CIRP –

1. a corporate debtor undergoing a CIRP; or
2. a corporate debtor having completed CIRP  twelve months preceding the date of making of the application; or
3. a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
4. a corporate debtor in respect of whom a liquidation order has been made.

The explanation to this section clarifies that a corporate debtor includes a corporate applicant in respect of such corporate debtor.

The Act numbers the above said explanation as Explanation I and inserted Explanation II after to the Explanation I.  The Explanation II clarifies that nothing in this section shall prevent a corporate debtor referred to in clauses (a) to (d) from initiating CIRP against another corporate debtor.

Moratorium

Section 14(1) of the Code discussed about the stay of action on the declaration of moratorium by the Adjudicating Authority.  Section 14(2) discussed about the supply of essentials to the corporate debtor.  Section 14(3) furnishes the transactions for which Section 14(1) are not applicable.

The Act brought a clarification by means of Explanation to section 14(1) of the Code.  Through this explanation it is clarified that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period.

The Act inserted a new section 14(2A).  The newly inserted section 14(2A) provides that where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.

The Act substitutes Section 14(3) for a new subsection.  The newly substituted section 14(3) provides that the provisions of sub-section (1) shall not apply to-

•  such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;
•  a surety in a contract of guarantee to a corporate debtor.

Appointment of interim resolution professional

Before this Act section 16(1) provides that the interim resolution professional shall be appointed within 14 days from the insolvency commencement date.  The Amendment Act reduces this time.  According to the amendment act, the Adjudicating Authority shall appoint an interim resolution plan on the insolvency commencement date.

Conducting of CIRP

Section 23(1) provides that the resolution professional shall conduct the entire CIRP and manage the operations of the corporate debtor during the CIRP period.

The Act inserted a proviso to section 23(1).  The newly inserted proviso provides that the resolution professional shall continue to manage the operations of the corporate debtor after the expiry of the CIRP period, until an order approving the resolution plan under sub-section (1) of section 31 or appointing a liquidator under section 34 is passed by the Adjudicating Authority.

Liability for prior offences

The Act inserted a new section 32A which deals with the liability for prior offences of the corporate debtor.

Section 32A(1) provides that notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not-     

• a promoter or in the management or control of the corporate debtor or a related party of such a person; or
• a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.

If a prosecution had been instituted during the CIRP against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled.

 Every person who was a ‘designated partner’ or an ‘officer who is in default’,  or was in any manner in charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor's liability has ceased under this sub-section.

Section 32A (2) provides that no action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the CIRP of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets to a person, who was not-

• a promoter or in the management or control of the corporate debtor or a related party of such a person; or
•  a person with regard to whom the relevant investigating authority has, on the basis of material in its possession reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.

The explanation to this section clarifies that-

• an action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, retention or confiscation of such property under such law as may be applicable to the corporate debtor;
• nothing in this sub-section shall be construed to bar an action against the property of any person, other than the corporate debtor or a person who has acquired such property through CIRP or liquidation process under this Code and fulfils the requirements specified in this section, against whom such an action may be taken under such law as may be applicable.

Section 32A (3) provides that subject to the provisions contained in sub-sections (1) and (2), and notwithstanding the immunity given in this section, the corporate debtor and any person who may be required to provide assistance under such law as may be applicable to such corporate debtor or person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the CIRP.

Amendment to section 227

Section 227 gives powers to the Central Government to notify the financial service providers.  The act inserted an explanation to this section clarifying that the insolvency and liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.

Amendment to section 239

Section 239 gives powers to make rules.  The Act inserted three more subjects on which the Central Government may make rules as detailed below-

(fa) the transactions under the second proviso to sub-section (2) of section 21;

(fb) the transactions under the Explanation I to clause (c) of section 29A;

(fc) the transactions under the second proviso to clause (j) of section 29A.