INSOLVENCY & BANKRUPTCY CODE, COVID-19 & MSMEs
(A DREADFUL COMBO)
INSOLVENCY AND BANKRUPTCY
CODE (AMENDMENT), 2020
CODE (AMENDMENT), 2020
By Arush Saini
With new objects, prior shortcomings and reasons shown by the warriors of the chambers and the courts, the need for better laws relating to Insolvency and Bankruptcy accrued, hence the legislature came up with some new and improved provisions in the Code via; Insolvency and Bankruptcy code (Amendment) 2020.
Some key highlights of new and reformed code are:
The Act inter alia aims to provide the insolvency process to be completed in a particular time frame, procuring the manner of voting by an authorised representative on behalf of the creditors along with the bestowal of preference upon secured creditors over operational and other creditors when it comes to the distribution of assets upon resolution of the corporate debtors.
Broader scope in the definition of ‘INTERIM FINANCE’
Interim Finance means a short-term loans required to let the company under the CIRP (Corporate Insolvency Resolution Process) running as a going concern.
The Code allows an IRP (Insolvency Resolution Professional) to raise interim finance in order to preserve and protect the value of the property of a company’s debt.
In the Code, the term ‘insolvency resolution process cost’ includes any interim finance raised for Corporate Debtor along with the cost of raising such interim finance.
The distribution canal u/s 53 of the Code provides for the highest priority to be given to insolvency resolution process costs which includes such interim finances.
SECTION – 7 : Initiation of CIRP by Financial Creditor
The amended Act also raises the minimum threshold for certain classes of creditors for initiating CIRP prescribing that the application by these creditors u/s 7(1) of the code shall be filed jointly by at least 100 such creditors ( who are related/affected ) or 10% of their total number (whichever is less )
The Act also clarifies that where such an application for initiating the CIRP against corporate debtors has not been admitted by the adjudicating authorities before the commencement of this amended legislation. Such application shall be modified to comply with the aforesaid requirements within 30 days of the commencement of the said Act, if failed then the application shall be deemed to be withdrawn before its admission.
Corporate Debtors are entitled to make application
Section 4 of the Act inserts an explanation u/s 11 of the Code which stipulates that a corporate debtor who is undergoing CIRP or having completed it in prior occurring 12 months of the date of making application or in respect of whom a liquidation order has been made shall be entitled to make an application to initiate CIRP against other corporate debtors thus, maximizes the value of a corporate debtor.
SECTION 23 – Management of operations of the corporate debtor (CD)
The substitution of Proviso u/s 23(1) of the Code clarifies that a Resolution Plan (RP) shall continue to manage the affairs of the CD till the RP is approved by the adjudicating authority u/s 31(1) or till the appointment of liquidator u/s 34 by the authority in the event of rejection of the RP for failure to meet requirements mentioned u/s 30. This might ease the functioning of a RP and also authorises management of affairs by RP during the normal leadership is suspended from the rejection to RP till appointment of liquidator.
Insertion of Section 32A
This section brings out the most significant amendment brought out by the parliament which embarks as the protective layer for the successful resolution applicants and their property from the threat of criminal proceeding qua the offences committed by the former promoters of the CD.
It provides that the liability of a CD for an offence committed prior to the commencement of the CIRP shall cease and the CD shall not be prosecuted for such an offence from the date on which the resolution plan had been approved by the adjudicating authority u/s 31 of the Code.
It has been further clarified that the person in charge of the management should not be the one with respect to whom any investigating authority has reason to believe that he had abetted or conspired for the commission of the offence and has submitted of filed a report or a complaint to the relevant court of authority.
CONCLUSION:
This amendment was needed with the evolving scenario and changing demands of Indian corporate sector. It equips the CD to initiate CIRP against other CDs, inserts Section 32A to immune the CD and its new management post the resolution process. The Code firmly holds with divergent views of the courts, professional experts and other stakeholders on its interpretation and implementation.
The Code is a welcome change when compared to other regimes of winding up and BIFR, which used to gobble decades for its finalization. The government has, since its inception, taken several steps to ensure a smooth ride for the Code but it must continue to do so with the ever evolving world.
Note: – We will issue next part of this article soon in which we will see ill effects of Covid-19 pandemic on MSMEs in relation to IBC as a dreadful combination
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