The new bankruptcy and insolvency law in India which was introduced in 2016 was a welcome change aimed at streamlining the insolvency resolution process in the country. The new regulation replaced the multiple laws governing insolvency and bankruptcy in India. It was framed with the primary motive of helping distressed creditors and reducing mounting Non-performing Assets (NPAs) of financial institutions. However, once the code was applied to actual situations, some issues, and inconsistencies were discovered. In order to resolve these problems, the Ministry of Corporate Affairs formed an insolvency law committee. The suggestions given by the committee were incorporated in the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 which was notified last year. Let’s take a look at the changes which helped improve the original code.
1. Recognizing Homebuyers as Financial Creditors
The new framework identified two types of creditors- financial and operational. Persons who were owed money by another entity are called financial creditors. People to who an operation debt like a trade debt was owed fell into the category of operational creditors. An issue arose when the new law was applied to insolvency proceedings related to real estate developers. There was no provision for categorizing the advance amounts paid by homebuyers to builders. Experts working with reputable law offices in India pointed out that builders were using this loophole to avoid compensating the buyers. The ordinance explicitly states that the money taken from an allottee by a real estate developer will be treated as financial debt. This means that homebuyer are at par with financial creditors and can initiate insolvency proceedings against builders. They are also entitled to a place in the Committee of Creditors (CoC).
2. No Dual Requirement For Debtors To Prove Disputes
Earlier corporate debtors who wanted to contest insolvency proceedings initiated by operational creditors had to provide dual proof of a dispute in the matter. They were required to establish that a dispute existed and a legal suit or arbitration proceedings were underway. This feature was challenged by debtors leading the Supreme Court of India to state that a dispute can exist in forms other than lawsuits and arbitration. The necessary change was made eliminating the condition of dual requirement. Alternative proofs of non-payment of operational debts like information utility records are now allowed. This modification was necessary to prevent trade creditors from initiating premature actions against debtors who were involved in genuine disputes with them.
3. Modifications In The Eligibility of Resolution Applicants
A key modification made to the bankruptcy and insolvency law in India is related to the eligibility of resolution applicants. Entities related to corporate debtors or their promoters whose loans have been non-performing assets (NPAs) for a period of 1 year, were not allowed to join the resolution process. The reason behind the inclusion of this condition was to prevent people who were party to the debtor’s failure from acquiring their assets at a discounted price. However, this resulted in numerous entities getting barred from the process even if they were remotely related to a disqualified person. The Ordinance notifies that financial institutions not affiliated to the debtor can be a part of the resolution procedure. Regulated financial creditors involved in a debt restructuring scheme with the debtor have also been now allowed to join the process.
4. Specific Exemption To MSMEs
The law now says that specific exemption must be given to MSME corporate debtors by allowing a promoter who is not a wilful defaulter to bid for the company under insolvency. This was done because many MSMEs were rendered incapable of repaying their debts as a temporary credit disruption was caused by the insolvency of their debtors. This affected the workforce of the MSME which was being pushed into liquidation for no fault of its own.
5. Necessary Shareholder Approval For Initiating Corporate Insolvency
Another key change introduced through the ordinance is related to corporate insolvency. At least 3/4th of the total number of shareholders or partners of an LLP must pass a special resolution to approve the initiation of the insolvency resolution process against a corporate debtor.
These are few of the major changes made to the bankruptcy and insolvency law in India. These modifications were necessary to maintain the effectiveness of the regulation and protect innocent people.