The Insolvency and Bankruptcy Code just got a facelift. The recent wholescale amendment comes on the heels of the limited amendment last year, which introduced the cancerous Section 29A. This time, perhaps chastened by its previous intervention, the Government constituted a committee that included TK Viswanathan (who headed the committee that drafted the Code) to suggest amendments. The so-named Insolvency Law Committee had the benefit of over a year’s worth of watching the IBC in action – seeing its provisions being interpreted by lawyers, observing the strategies that creditors and debtors employed, and taking stock of winners and losers (with homebuyers clearly falling in the latter category). The committee’s recommendations have been fully accepted by the Government, which brought them into force by an Ordinance that came into effect on 6th June. The changes are welcome – mostly. Since the Government will not admit that it made a mistake by introducing 29A, we have to live with what we can get. Here’s a quick roundup of the highlights.
More Of The NCLT?
If the IBC has had one bottleneck, it has been litigation at the NCLT. The Tribunal is alarmingly understaffed, and its judges often seem ill-equipped to decide complicated questions of corporate law – something that shows in their thinly-reasoned orders. Under the circumstances, the last thing anyone would expect would be for the already-overflowing cup of the Tribunal to be dunked in the city reservoir. Added to all its other responsibilities, the NCLT now has to certify that a resolution plan has “provisions for its effective implementation”. Terminal silliness, as the late Justice Antonin Scalia once wrote.
Homebuyers Are Now Financial Creditors
Well, it’s happened. I called the proposal to deem homebuyers as financial creditors as “the gormless culmination of a fruitless battle” when it was being considered, but who cares what I think? It’s the law now. Earlier, as per the Code, only actual financial creditors like banks could sit on the Committee of Creditors that votes on bids for the company. Now, in the case of insolvent housing and construction companies, any one who paid for a flat is entitled to a place on the Committee. Prepare to see committees with members running in the thousands. Sir Barnett Cocks, who was Clerk of the House of Commons in the 1960s, is chiefly remembered for saying that “a committee is a cul de sac down which ideas are lured and quietly strangled”. I assume Sir Barnett would be horrified if he knew what the Government has gone and done.
Goodbye To Repayment
A notable, and slightly annoying, new change is the substitution of the word “payment” for “repayment” everywhere in the Code. The Insolvency Law Committee thought that “payment” is wider than “repayment” and covers defaults in paying taxes and cesses. Except…it mindlessly makes the switch even in parts where “repayment” would be more appropriate. For instance, Section 8(2) spoke of the corporate debtor bringing to the notice of the operational creditor its repayment of its unpaid debt. The use of “payment” in this context isn’t precise enough, as even the payment of an unpaid debt in part, and not in full, is a payment nonetheless – an interpretation which would make the entire scheme of that section fruitless.
Mummy, Daddy, Baby
As per the Code, related parties are barred from sitting on the Committee of Creditors. The Insolvency Law Committee wanted a detailed definition of the term “related party”, so there won’t be any confusion. In an attempt to be specific, the statute consists of a hilariously long list of relatives that most of us wouldn’t want at our funerals. Starting modestly with “husband”, this list ends with “mother’s brother and sister”, with stops along the way to pick up “grandson’s daughter and son” and “sister’s son and daughter”.
29A, 29 Nay
The maddeningly wide Section 29A lists out several disqualifications for prospective bidders. In a desperate attempt to contain its Himalayan reach, the new amendments have tried gamely to dilute the Section with a slew of exceptions and exemptions. So MSMEs, or small and medium enterprises, will be exempt from certain disqualifications, and so will financial creditors. Guarantees to insolvent creditors now lead to the guarantor being disqualified only if the guarantee is unpaid. Convictions lead to disqualification only if the conviction is under the acts enumerated in the newly inserted Twelfth Schedule.
Why don’t they just delete the Section?
Post-Mature Withdrawals
Settlements under the Code were earlier only allowed till the admission stage, with parties having to approach the Supreme Court in its jurisdiction under Article 142 of the Constitution if they wanted an application to be withdrawn after admission. Since this was cumbersome and expensive, the Code now provides that the NCLT can allow an insolvency application to be withdrawn if the applicant so applies and 90% of the Committee of Creditors agree.
I’m curious to see the effect of this on bidders’ strategies. A losing bidder can now theoretically enter into a sweetheart deal with the Committee of Creditors and kill the winning bidders’ chances even after the winning bidder has negotiated successfully with the Committee of Creditors and given a performance guarantee.
The possibilities for manipulation are endless, and I don’t think the Insolvency Law Committee fully thought this one through.
