Insolvency and Bankruptcy Code Current Affairs

Government releases draft on cross-border insolvency resolution

The Ministry of Corporate Affairs has released draft on cross-border insolvency in order to strengthen Insolvency and Bankruptcy Code (IBC). It will help banks access overseas assets of company undergoing resolution. Similarly, Indian authorities will also be required to cooperate with foreign creditors to domestic company.

Need

The existing IBC provides for two Sections –234 and 235 relating to cross border insolvency but these are not adequate to effectively deal with default cases of domestic corporate debtor having assets and operations outside India. In many of ongoing cases under IBC, several companies have assets and operations outside India, for which legal framework is required to deal assets overseas.

Existing provisions only allow Central government to enter into agreement with foreign country for enforcing provisions of Code. Second, the government can issue a letter of request to country outside India seeking information. The draft norms have now been issued to plug these loopholes and have any effective resolution mechanism in place for cross-border insolvency.

Key Facts

The draft on cross-border insolvency favours adoption of UNCITRAL (United Nations Commission on International Trade Laws) Model Law on Cross-Border Insolvency, 1997. Under it, central government after entering into agreement with other countries may bring overseas asset of domestic corporate debtor into consideration of insolvency resolution in India. Initially, cross border insolvency framework will apply only to corporate debtors, but later it will be extended to cases of personal insolvency resolution as well.

UNCITRAL Model Law on Cross-Border Insolvency, 1997

On global scale, this model law envisages balance between liquidation and reorganisation of global companies going in for resolution. It has emerged as most widely accepted legal framework to deal with cross-border insolvency issues while ensuring least intrusion into country’s domestic insolvency law. Due to growing prevalence of multinational insolvencies, the model law has been adopted by 44 States till date, including Singapore, UK, and US.

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Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 Promulgated

President Ram Nath Kovind has assented to the promulgation of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 on June 6, 2018. This ordinance makes some fine-tuning mechanisms in the Insolvency and Bankruptcy Code, 2016.

Key Points

This ordinance brings some specific changes affecting mainly real estate and financial sectors. The notable changes are as follows:

Homebuyers Recognized as Financial Creditors

After this amendment, the IBC law will recognize the homebuyers as financial creditors, giving them due representation in the Committee of Creditors (CoC). Thus, now home buyers will be an integral part of the decision making process. The CoC will also have representation from security holders, deposit holders and all other financial creditors.

Special Provisions for MSME

The amendment ordinance gives some special benefits to the Micro, Small and Medium Sector Enterprises. Now, the promoters of MSMEs are allowed to bid for their companies as long as they are not wilful defaultersand don’t attract any other related disqualification. This has corrected the anomaly in the section 29A of the existing act which had barred promoters of defaulting assets from bidding for their assets.

Withdrawal of Insolvency Application

The ordinance permits the withdrawal of the insolvency applications only if it is approved by 90% vote share of the CoC. Further, the CoC voting threshold has been brought down to 66 percent from 75 percent for all major decisions such as approval of resolution plan, extension of insolvency period etc. This is to encourage resolution versus liquidation.

Other provisions

Other notable provisions are as follows:

  • It brings more clarity by laying down mandatory timelines, processes and procedures for corporate insolvency resolution process.
  • Addresses some issues such as non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value of assets.
  • Exempts pure play financial entities from being disqualified on account of NPA and NPA acquired under Insolvency Code shall not disqualify an entity for the next three years.
  • Successful resolution applicants will get a minimum one-year grace period to fulfill various statutory obligations.
  • It also addresses the much litigated issue of enforcement of guarantees.

This part, the corporate debtors who want to themselves trigger insolvency will need shareholders approval via special resolution.

Significance for Real Estate

This ordinance provides relief to home buyers by recognizing their status as financial creditors. Due representation in the Committee of Creditors (CoC) makes them integral part of the decision-making process. Section 7 of the law will allow financial creditors to file application seeking insolvency resolution process. This is important because many home buyers are facing hardships on account of delayed and incomplete real estate projects.

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