Search. If MSMEs are expected to contribute more actively to the economic upliftment of India, the IBC must introduce yet another amendment to rescue the MSMEs from their vicious cycle of indebtedness and bring them at par with financial creditors. IBC Agents; Trust Agent; PUBLICATIONS. Other than demanding the removal of discrimination amongst financial creditors on the basis of existing priorities or security interest in a resolution plan, they had demanded fairness in resolution plans of bankrupt companies for financial and operational creditors and that they are treated similarly by receiving the same percentage of haircut. Accordingly, the. (1) This Act may be called the Insolvency and Bankruptcy Code (Amendment)Act, 2020. An insolvency law should have two broad objectives. 26 OF 2019 [5thAugust,2019.] The Insolvency and Bankruptcy Code (Amendment) Act, 2019 seeks to address critical gaps and inconsistencies in insolvency resolution timelines, payments received by operational creditors under a resolution plan and manner of voting by an authorised representative on behalf of the class of financial creditors Background. BE it enacted by Parliament in the Seventieth Year of the Republic of India as follows:— 1. However, it certainly leaves one wondering whether. Pratik Datta is a Senior Research Fellow, and Varun Marwah is a Research Fellow at Shardul Amarchand Mangaldas & Co. In other words, even in such transactions, the distribution of value must follow the statutory waterfall. A question of balance, via the code or otherwise. (R Narayan is the Senior Vice President at FICCI-CMSME and Founder & CEO at Power2SME. But once distribution among claimants as per the statutory waterfall is achieved, there is nothing further to be gained by subjecting each and every resolution plan to judicial review. First passed in Parliament in May 2016, the Code provides for resolution of insolvencies in a time-bound manner. International Money Exchange Services Licence. Whether this outcome is achieved in practice will depend largely on how the judiciary interprets and implements these new provisions. The immediate trigger for this reform was the National Company Law Appellate Tribunal (“NCLAT”) judgment dated July 4, 2019, in the resolution of Essar Steel Ltd. (“Essar judgment”). The Essar judgment held that section 53 cannot apply to distribution proposed by a Resolution Applicant. (l) This Act may be called the Insolvency and Bankruptcy Code (Amendment) Short title and Act, 2019. commencement. In restructuring or other hybrid transactions involving non-cash consideration, notional distribution of non-cash value in form of rights to the restructured business (that is, its securities) is likely to be contentious, given that distribution will be provided by the resolution plan and/or the lack of price discovery. A gaping shortfall of the IBC is that it only admits applications against private and public limited companies and Limited Liability Partnerships (LLP) as defaulting corporate debtors. Deriving its authority from the IBC, the CoC can consider the manner of distribution of proceeds of a resolution plan and can take into account the order of priority amongst creditors, including the priority and value of the security interest of a secured creditor. For example, Chapter 11 of the US Bankruptcy Code deals with restructuring. Territorial Tax System now applies to both local companies and IBCs. The successful buyer deposits this value in cash or its equivalent in an escrow account and takes over the business, immediately putting the assets to their best use. In such circumstances, instead of a going concern sale to a new buyer through an auction, the claimants of the insolvent business may be better off by “selling” the business to some or all of the existing claimants themselves. A major drawback for the MSME sector is that the amendment has failed to equalize financial and operational creditors. Such “hypothetical sale” is commonly referred to as restructuring. An Act further to amend the Insolvency and Bankruptcy Code, 2016. In the Waterfall Mechanism, financial creditors are placed second while MSMEs are fourth. ... (equivalent to ₹ 390 billion or US$5.5 billion in 2019) Tata Steel, through its wholly owned subsidiary Bamnipal Steel Ltd (BNPL), has acquired 72.65 per cent controlling stake in Bhushan Steel Ltd (BSL) for around Rs 36,400 crore. In this context, the IBC (Second Amendment) Bill, 2019 was introduced in Lok Sabha on December 12, 2019. To prevent such unfair discrimination, judicial review of resolution plans in restructuring transactions is necessary. Moreover, the NCLAT also held that the statutory waterfall under section 53 of IBC does not apply to distribution under a resolution plan. The Insolvency and Bankruptcy Code (Amendment) Act, 2019 came into force on 16 August 2019. Unlike US Bankruptcy Code, section 30(2) of IBC applies minority creditor protection mechanisms, meant primarily for restructuring (non-cash) transactions, to even sale (cash or its equivalent) transactions. First, it must achieve the most efficient economic outcome for the insolvent business. The Insolvency And Bankruptcy Code (Amendment) Ordinance, 2019. How path-breaking verdicts, crucial amendments shaped insolvency laws in 2019 The IBC Amendment Bill 2019 expanded the ambit of the insolvency law … Check out LIVE streaming links, special IPL recharge/subscription packages, IPL opening schedule, Jaya Bachchan shoves fan trying to take selfie during her Howrah roadshow; video goes viral, Coronavirus Lockdown April 8 Highlights: In address to nation, PM Modi stresses on micro-containment zones, suggests 'teeka utsav', Coronavirus Lockdown India April 9 Highlights: Delhi reports steep 1-day hike with over 8,000 new cases; Kejriwal shuts down schools, Vakeel Saab Box Office Collection: Pawan Kalyan starrer Pink remake on track for bumper Day 1 numbers, Steel stocks to buy: Indian steel price at 3-month high; Jefferies sees 30% upside in these two shares, Gold prices fall on Thursday after rising to one-month high in previous session; MCX silver slumps, 10 banks currently offering the highest interest rates on fixed deposits, Exit Polls 2021: Kerala, Tamil Nadu, Assam, West Bengal, Puducherry Assembly election result predictions on April 29, Market Highlights: Sensex falls 154 points, Nifty ends at 14,834; Bank stocks, Reliance Industries top drags, Farmers Protest Live News: Farmers block Kundali-Palwal expressways; warns government of intensifying protest, West Bengal Assembly Elections 2021 Phase 4 Voting Live: Polling begins for 44 constituencies; Babul Supriyo, Partha Chatterjee in fray, NHAI plans to award projects worth Rs 2.25 lakh cr in FY22, FY2020-21: Direct tax receipts up Rs 40,000 cr over RE, Hotspots: Public Wi-Fi network gathers pace, For every e-NAM deal worth Rs 100, just Rs 1 routed via DBT, PLI for white goods: The key to Atmanirbhar Bharat, Copyright © The 2019 Bill has now modified the law to achieve this optimal outcome. Financial Express is now on Telegram. Subsequently, the IBC (Amendment) Ordinance, 2019, similar to the Bill, was issued on December 28, 2019. This explanation should narrow down the focus of judicial review to ensure distribution as per the statutory waterfall. Section 1129 in this chapter requires a restructuring plan to provide every creditor at least the liquidation value. [1]. While the Amendment has sought to trim the timelines taken for resolutions, it has failed to bring about any upliftment for the status of MSMEs in the reclamation of debts, thus overruling the NCLAT’s judgement in the Essar Steel Case. (1) This Act may be called the Insolvency and Bankruptcy Code (Amendment) Act, 2019. In this case, the NCLAT found ArcelorMittal’s resolution plan to be discriminatory. Shardul Shroff and Misha (2019) had earlier highlighted that excessive judicial discretion in corporate insolvency resolution is contrary to the express provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”). (This article was first published on The Leap Blog, 7 August, 2019), Copyright © 2021 Bar and Bench. By Webmaster. Evidently, the US law clearly recognises the difference between sale and restructuring transactions. Shortcomings in IBC and the proposed solutions. The Code consists of two major processes: insolvency procedure and actual liquidation. No. Section 227 of the IBC empowers the central government to direct a financial service provider to the IBC for resolution of insolvency, however, this means that financial institutions lie at the mercy of the central government to undergo insolvency proceedings, in the absence of which, they will perish faster and be unable to salvage the losses for their stakeholders. Operational creditors are excluded from the CoC who determine the resolution plan. 48 of 2012; IBC (Amendment) ACT #24 of 2018; SI No.11 of 2019; LICENSED REGISTERED AGENT. Insolvency & Bankruptcy Code(Amendment) Act, 2019 (dated 05.08.2019) (see updated IBC Act) The 2019 Bill attempts to address this problem too. In such a restructuring, there is no -auctioning of the insolvent business to potential outside buyers. Judicial review of resolution plans may be necessary only to prevent such unfair value extractions in violation of the statutory waterfall. In Seychelles. The Government of India has taken swift action to address these burning issues by introducing the Insolvency and Bankruptcy Code (Amendment) Bill, 2019 (IBC Bill). (AMENDMENT) BILL, 2019 (AS PASSED BY THE RAJYA SABHA) A BILL further to amend the Insolvency and Bankruptcy Code, 2016. As a result, there is no price discovery and the precise value of the insolvent business in cash or its equivalent is not evident. Accordingly, it went on to modify the plan such that the financial and operational creditors enjoy the same recovery rate. This could create opportunities for value extraction from minority to majority claimants through resolution plans in such restructuring or hybrid transactions. (“2019 Bill”) has been passed by the Parliament. The International Business Companies (Amendment) Act, 2018 (“Amendment Act”) came into effect on 1 January 2019 which amends the International Business Companies Act, 2016 (“IBC Act”). First amendment to the IBC gives ability to home buyers to file insolvency and participate in the resolution process. In other words, the rights of the existing claimants to the pool of assets simply get redistributed or restructured. First, given the uncertainty regarding the value of the restructured business itself, there could be ambiguity about how much value should each claimant receive under the waterfall. The Code provides a time-bound process for resolving insolvency in companies and among individuals. Once the best price is discovered, that price signifies the precise value of the business. The amendment aspires to reduce the scope of judicial intervention and litigation by clarifying that under the resolution plan, payments made to operational creditors and dissenting financial creditors will be construed as fair and equitable to such creditors. Therefore, the resolution plan cannot in any way unfairly discriminate against any claimant. Accordingly, the IBC (Amendment) Bill, 2019 (“2019 Bill”) has been passed by the Parliament. However, by failing to fully explain the concept of fair and equitable distribution of settlement proceeds or the liquidation value, operational creditors have once again been left high and dry. While it amended by means of addition and modification of some clauses, it failed to make any positive impact for the MSME sector. Such transactions would then be a hybrid exhibiting features of both a going concern sale for cash as well as that of restructuring for non-cash considerations. The 2019 Bill attempts to address this problem. The NCLAT wanted to abrogate this provision since the CoC includes financial creditors who will seek to favour their own vested interests in the resolution, but these suggestions have not been addressed in the latest Amendment Act. Ironically, it is under the same measures that many MSMEs are declared NPAs due to non-payment of dues owed to them owing to lower prioritization in the proceeds of distribution of assets. Recent Article. Another discrimination against operational creditors is that in case of insolvency, the IBC provides for payment to them of an amount which is higher of the two: These measures are crushing for the recovery of dues of MSMEs since they would recover very little or no amount under either circumstance. Views expressed are the author’s own.). Or even if there are buyers, there could be an oversupply of similar assets in the market due to industry wide factors, pushing down the price for such assets. The amendments have been made in order to ensure time bound resolution of a … By disrupting the basic fundamentals of banking, this decision caused much concern in the Indian financial sector. Like us on Facebook and follow us on Twitter. The NBFC crisis in India brought to light the absence of bankruptcy legislation exclusively for financial institutions since banks, insurance companies, NBFCs and stock exchanges lie outside the scope of the IBC. In a going concern sale, the business of the insolvent company is marketed for price discovery, that is, it is auctioned. Accordingly, the IBC (Amendment) Bill, 2019 (“2019 Bill”) has been passed by the Parliament. Parliament on Thursday passed the Insolvency and Bankruptcy Code (amendment) Bill 2019, which brought in eight amendments as part of efforts … However, going concern sales through auctions are not always possible or desirable. The same logic applies to distribution in liquidation involving sale of assets for cash or its equivalent. Ease of Doing Business for MSMEs: Touted as landmark legislation in heralding a massive transformation in the recovery and resolution process, the Insolvency & Bankruptcy Code of India was amended on 6th August 2019 for the 5th time. While the IBC may provide an interim diagnosis for financial institutions at the behest of the centre, it is absolutely imperative to constitute a separate legislative framework which monitors financial health, anticipates risk, and resolve insolvency of financial institutions. MSMEs are recognised as operational creditors under the IBC, which confers an elevated status to the financial creditors. For instance, some new investors may pay up cash to buy some equity or take on some debt of the restructured company, while existing lenders may swap some of their debt into equity of the restructured company. IBC ACT; LLC ACT; SI. Second, the value (cash/non-cash) received from the outcome must be distributed among the claimants of the company according to the waterfall provided in the insolvency law. However, in reality, resolution plans could propose transactions that may not squarely fall within these simple categories. India will have the largest working-age demographic in 2020 and the MSME sector is expected to provide employment to the teeming masses, which will not be possible if they themselves are cash strapped and sinking. It is important to recognise that such transactions effectively help preserve the going concern value of the insolvent business. Unlike a going concern sale, the notional distribution of rights in a restructuring has to be determined by the resolution plan. 2019 IBC Amendment Bill: Swift Action for Course Correction. First, the statutory waterfall under section 53 of the IBC was initially envisaged only for distribution in liquidation. Indian policymakers have now recognized this problem. By L. Viswanathan, Gaurav Gupte & Madhav Kanoria on July 30, 2019. This safeguard is not applicable to sale transactions (for cash) under section 363 of Chapter 3 of the US Bankruptcy Code. Click here to join our channel and stay updated with the latest Biz news and updates. And this distribution function has to be performed by the resolution plan itself. Next Post. In case of liquidation of assets, the financial creditors claim the lion’s share of returns, leaving little to trickle down to the operational creditors, which are then declared insolvent/bankrupt themselves. Vs. Satish Kumar Gupta, RP of Essar Steel & Ors.
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