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Key takeaways from proposed changes to the Insolvency and Bankruptcy Code, 2016

The Union cabinet has approved of proposal to carry out reformatory changes to the Insolvency and Bankruptcy Code, 2016 ('IBC'). A press release dated July 17, 2019 has been issued by Ministry of Corporate Affairs in this regard. The main objective of amendments is to accelerate insolvency resolution process under the IBC, 2016. The legislature has focused on various issues and proposed amendments which will bring more clarity to the Code. The major changes are as viz. Extension of deadline for completing Insolvency resolution process, Inclusion of M&A, demerges as part of resolution plan, clarification on rights of creditors etc. The proposed amendments are expected to be placed before Parliament in the current session. Key proposed amendments to the Insolvency and Bankruptcy Code are discussed hereunder: Extension of deadline for completing Insolvency resolution process: One of the major proposed amendment to IBC is extension of the deadline for completion of Corporate Insolvency and Resolution Process (CIRP). The amendments propose to extend the period of CIRP to 330 days against the current maximum permissible period of 270, i.e., 180 days plus extension of 90 days for completing CIRP. However, while calculating the time 330 days, litigation and other judicial process would be included. In the past judicial pronouncements on IBC, it has been observed that Tribunals have taken soft approach of excluding the time spent on pending litigations while computing the 270 days for completing resolution process. The proposed amendment leaves no scope for extension of CIRP period on account of litigation related technicalities which are adopted to delay the liquidation/resolution process. Corporate Structuring scheme to be part of resolution plan: The proposed amendments seek to enhance the flexibility on resolution plan. Resolution plan would include Corporate Restructuring Scheme such as mergers, amalgamation, demerger, takeover, Compromise and arrangement and so on. Casting of votes by majority: The proposed amendment sheds light on casting of votes by financial creditors whose financial debts is in form of securities or deposits, represented by a guardian and so on. The amendments would have major impact on class of creditors. The proposed amendments explicate that votes of financial creditors would be counted as per the decision of the majority, i.e., highest voting share of financial creditors. Having said that, if more than half of the creditors presenting in meeting approve a plan, it will be considered that the entire class of creditors has approved it. Rights of financial creditors: The amendment brings more clarity on rights of financial as well as operational creditors who have not voted in favor of a resolution plan. The amendment proposes that they will be paid as per the order of priority specified in the IBC while distributing the proceeds from resolution or liquidation. The Code provides highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority. Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds. The intention of Government is very clear with this proposed amendment that it would give priority to financial creditor over the operational creditor. Recently, The NCLAT modified the Rs 42,000-crore ArcelorMittal resolution plan for Essar Steel to treat various classes of creditors equally, providing for 60.7% recovery of claims for all. The order of NCLAT however, has been challenged by the financial creditors of Essar Steel in the Supreme Court. The NCLAT's order has been key factor prompting Government to bring reform to the Act to ensure the spirit of the Act. Binding in nature: Any resolution plan or liquidation order as decided by the competent authority would be binding on all the stakeholders including the Central Govt., any State Govt. or local authority to whom a debt in respect of the payment of the dues may be owned. This will prevent State authorities, Regulatory bodies including Direct & Indirect Tax Departments from questioning the resolution plan or liquidation order as well as jurisdiction of Tribunals with regard to IBC. Delegation of power: The amendment proposed more power to Committee of creditors. The COC can take into account commercial considerations in respect of distributions under the resolution plan, making the resolution process hassle free. The proposed amendment would also empower the Committee of Creditors to take the decision to liquidate the corporate debtor (where it is inevitable to revive the corporate debtor), any time after constitution of the Committee of Creditors and before preparation of Information Memorandum. The press release issued by Ministry of Corporate Affairs says that the changes are expected to lead to timely admission of applications and timely completion of the Corporate Insolvency Resolution Process, greater clarity on permissibility of corporate restructuring schemes, manner of distribution of amounts amongst financial and operational creditors, clarity on rights and duties of authorized representatives of voters and applicability of the resolution plan on all statutory authorities. The amendments are expected to address the issue of sanctity of timelines for completion of the entire corporate insolvency resolution process and also maximize the outcomes envisioned in the Code. The proposal is in line with the overall objective of the government to achieve the outcomes envisioned in the Insolvency and Bankruptcy Code and seeks to ensure speedier resolution of cases involving corporate debtors.

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