Insolvency & Bankruptcy Code - 2018 Annual Round Up

The year 2018 also witnessed major changes in the field of Insolvency and Bankruptcy Code(IBC).While the year 2017 witnessed SC explaining the basic concepts of the nascent legislation, the year 2018 saw SC addressing more complex issues in relation to it.The significant decisions of 2017 were Innoventive Industries v ICICI Ltd and Mobilox Innovations Pvt Ltd v Kirusa Software Ltd.Innoventive Industries explained IBC's objective and the procedure for initiating Corporate Insolvency Resolution Process(CIRP).The judgment also threw light on the concepts of "financial debtor" , "operational debtor", "dispute" etc under IBC. Mobilox decision rendered clarity to the concept of dispute in relation to operational creditor. It was held that in case of an operational debtor, to stall CIRP, it was not necessary that a court proceeding in relation to dispute was pending; mere existence of dispute, irrespective of pendency of legal proceedings, would suffice.The 2018 decisions of SC and NCLAT were mostly based on the principles elucidated in the said two decisions.A quick recap of the major developments of 2018 in IBC is given below :First Amendment Act The first amendment to IBC was made as per Act notified on January 18, 2018.The amendment took force with effect from November 23, 2017, replacing the Ordinance.It extended the application of IBC to personal guarantors of corporate debtors and proprietorship firms, by amending Section 2. It also introduced Section 29A prescribing the class of persons who are ineligible to participate in the resolution process. This ensured that unscrupulous promoters of the distressed company will not derive benefits out of the process.It restricted people, who with their misconduct contributed to defaults of companies, from regaining control of the corporate debtorThe amendment to Section 35 ensured that assets of the company will not be sold to disqualified persons.Second AmendmentThe second amendment to IBC was made as per Act notified on August 17, 2018, with effect from June 6, 2018. It replaced the amendment ordinance promulgated in June.After the amendment, home-buyers are also treated as financial creditors. This is done by expanding the definition of 'financial debt' as given in Section 5(8) of the Code. The amendment included an explanation after clause(f) of Section 5(8) as follows : "any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing"Section 238A inserted by this Act made Limitation Act applicable to IBC proceedings. It reduced the voting threshold in the CoC as 66% from 75%.Jaypee Infratech caseOn August 9, the SC vacated the stay of insolvency proceedings against Jaypee Infratech Ltd in NCLT Allahabad.It was in August 2017 that insolvency proceedings were initiated against JIL, which was declared by the RBI to be in default of about Rs.8000 crores. Later, a group of nearly 646 home allottees moved the SC contending that insolvency process will not protect their interests and sought stay of proceedings. The Court granted stay, observing that homebuyers will get nothing out of insolvency proceedings. The promoters of JIL were directed to deposit an amount of Rs.750 crores in SC as condition for stay.The SC noted that after IBC second amendment, homebuyers are treated as financial creditors. Therefore, their representation is ensured in the CoC.The Court also rejected the offer made by the promoters of JIL for reconstruction of debts. Referring to the newly introduced Section 239A, the Court held that the promoters were disqualified from submitting resolution plans.The request by the homebuyers for pro rata distribution of the amount deposited in SC by the promoters amongst themselves was not acceded by Court. The Court held that homebuyers were just one among the class of creditors, having no preferential claim.Moratorium will not apply to guarantorThe SC held in State Bank of India v Ramakrishnan that moratorium under Section 14 of the IBC will not apply to personal guarantor of the corporate debtor."Section 14 refers to four matters that may be prohibited once the moratorium comes into effect. In each of the matters referred to, be it institution or continuation of proceedings, the transferring, encumbering or alienating of assets, action to recover security interest, or recovery of property by an owner which is in possession of the corporate debtor, what is conspicuous by its absence is any mention of the personal guarantor. Indeed, the corporate debtor and the corporate debtor alone is referred to in the said Section. A plain reading of the said Section,therefore, leads to the conclusion that the moratorium referred to in Section 14 can have no manner of application to personal guarantors of a corporate debtor", held the bench of Justice R F Nariman and S K KaulThe Court noted that Section 14(3) was amended by the Second Amendment Act to state that guarantors are excluded from...

Insolvency & Bankruptcy Code - 2018 Annual Round Up

Manu Sebastian

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