Insolvency and Bankruptcy Code (Amendment) Act, 2020 : A Primer

"Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress." – Dr. M.S. Sahoo (Chairperson, Insolvency and Bankruptcy Board of India) The above quoted words of Dr. Sahoo from his article in the print edition of Indian Express on March 14, 2020 under the title: 'The real reform', form the underlying theme of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 ("2020 Amendment Act", for short). The Statement of Objects and Reasons of the corresponding bill ascribes the need for the fourth legislative intervention to the Insolvency and Bankruptcy Code, 2016 ("IBC 2016", for short) to conferment of highest priority in repayment to last mile funding to corporate debtors to prevent insolvency, prevention of potential abuse of the Code by certain classes of financial creditors, provision of immunity against prosecution of the corporate debtor and action against the property of the corporate debtor and the successful resolution, and filling of the critical gaps in the corporate insolvency framework. All such objectives and reasons are primarily aimed at rescuing the 'titanic' from sinking than airlifting-securing a few influential and powerful passengers, though at the cost of some damage and disfigurement of the ship; a sentiment that has echoed with the NCLAT in its judgment of March 12, 2020 in the IL&FS matter. The NCLAT, while rejecting the objections raised by some financial creditors over distribution of funds under the revised distribution framework, has upheld the scheme of pro-rata distribution suggested by the Union of India and IL&FS, stating that it would be in consonance with the public interest. The 2020 Amendment Act was passed by the Lower House of the Parliament on March 6, 2020 and by the Upper House on March 12, 2020. After receiving the assent of the President, the Amending Statute was published in the Official Gazette on March 13, 2020. This Article attempts to underscore and unfold the changes introduced in the Code by the 2020 Amendment Act. Key Highlights of the 2020 Amendment Act: The Act inter alia aims to provide a timebound completion of the insolvency process, confers preference upon secured financial creditors over operational creditors in the matter of distribution of assets upon resolution of a corporate debtor, and lays down the manner of voting by an authorised representative on behalf of the class of financial creditors. Insolvency Commencement Date Section 2 of the 2020 Amendment Act deletes the proviso from the definition of "insolvency commencement date" u/s 5(12) of the Code such that the insolvency resolution process commences from the date of admission of an application for initiating corporate insolvency resolution process (CIRP), and not when the Interim Resolution Professional (IRP) is appointed by the adjudicating authority ("AA", for short). The corresponding change brought out in Section 16(1) of the Code mandates the AA to appoint the IRP on the insolvency commencement date, thereby withdrawing the leeway of 14 days from the insolvency commencement date for the appointment of IRP. The above amendment curtails the anticipated delay in completion of resolution to the extent of 14 days. Expansion of definition of 'interim finance' The legislature has expanded the ambit of 'interim finance' u/s 5(15) of the Code by insertion of the words "and such other debt as may be notified" at the end of its definition. Interim finance essentially refers to short-term loans required to keep a company under the CIRP running as a going concern. The Code allows an IRP/RP to raise interim finance in order to protect and preserve the value of the property of a corporate debtor ("CD", for short) and to manage its operations as a going concern. In the Code, the term 'insolvency resolution process cost' includes any interim finance raised for a corporate debtor along with the cost of raising such interim finance. The distribution waterfall u/s 53 of the Code provides for the highest priority to be given to insolvency resolution process costs, which includes such interim finance. Thus, the Parliament, by expanding the definition of 'interim finance', has underscored its importance in the management of the operations of CD and endeavoured to give some free hand to the IRP and Committee of Creditors ("CoC", for short) to run and maintain the company as a going concern. Section 7 – Initiation of corporate insolvency resolution process by financial creditor The 2020 Amendment Act raises the minimum threshold for certain classes of financial creditors for initiating CIRP, prescribing that the application by these creditors u/s 7(1) of the Code should be filed jointly by at least 100 such creditors or 10% of their total number, whichever is less. These classes include real estate allottees and security or deposit holders...

Insolvency and Bankruptcy Code (Amendment) Act, 2020 : A Primer

Abhishek Gupta

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