Monday, December 5, 2016

Corporate Insolvency Resolution Process under the Bankruptcy Code: Relevant Provisions Notified

[The following guest post is contributed by Shikha Bansal, under the aegis of Vinod Kothari & Company. She can be contacted at Shikhabansal2610@gmail.com]

The Ministry of Corporate Affairs, by way of Notification no. S.O. 3594(E) dated 30 November 2016, has notified 1 December 2016 as the date for commencement and enforcement of certain core sections of the Insolvency and Bankruptcy Code, 2016 (“the Code”), as listed below –

(i)   clause (a) to clause (d) of section 2 (except with regard to voluntary liquidation or bankruptcy);

(ii)  section 4 to section 32 [both inclusive];

(iii) section 60 to section 77 [both inclusive];

(iv) section 198;

(v)  section 231;

(vi) section 236 to section 238 [both inclusive]; and

(vii) clause (a) to clause (f) of sub-section (2) of section 239.

The provisions pertain to the corporate insolvency resolution process envisaged under the Code.
It may be noted that a few days ago the Central Government, by way of Notifications S.O. 3568(E) and S.O. 3569(E), both dated November 25, 2016, notified 1st December, 2016 as the date on which the SICA Repeal Act, 2003 shall come into force. On and from this date, any reference or inquiry pending before the Board of Industrial and Financial Reconstruction (“BIFR”) and any appeal pending before the Appellate Authority for Industrial and Financial Reconstruction (“AAIFR”) shall stand abated, and companies may make reference to the National Company Law Tribunal (“NCLT”) under the Code within 180 days from the commencement of the Code in accordance with the provisions of the Code.[1]

The present notification opens the gate for such companies too to proceed for resolution under the Code.

Enforcement Status of the Code Till Date

It may be noted that the proviso to section 1(2) of the Code allows for a piecemeal enforcement of the Code. The Central Government, so far, has issued give notifications. The present notification is fifth in the series, with the earlier ones being –

(1)        Notification S.O. 2618 [E] dated 5 August 2016[2] notifying 7 sections of the Code. Sections 188 to 194 (both inclusive) were enforced.[3]

(2)        Notification S.O. 2746 [E] dated 19 August 2016[4] , notifying 17 sections of the Code under Chapter VII of Part IV and sections under Part V of the Code.[5]

(3)        Notification SO 3355 [E] dated 1 November 2016[6] providing for commencement of Sections under Chapter II, Chapter VII of Part IV and sections under Part V.[7]

(4)        Notification S.O. 3453(E) dated 15 November 2016[8] providing for commencement of Sections under Chapter III, Chapter IV, Chapter VI of Part IV and sections under Part V.[9]

 

Provisions Notified in the Present Notification

1.         Section 2(a) to 2(d) (except with regard to voluntary liquidation or bankruptcy) – Applicability of the Code

Section 2 deals with the applicability of the Code. It reads as follows:

“2. The provisions of this Code shall apply to—

(a) any company incorporated under the Companies Act, 2013 or under any previous company law;

(b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;

(c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008;

(d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and

(e) partnership firms and individuals,

in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.”

Note that only clauses (a) to (d) of section 2 have been notified. The provisions relating to insolvency resolution and bankruptcy of individuals and partnership firms have not been notified. Further, provisions relating to liquidation and voluntary liquidation of the persons covered under clauses (a) to (d) are due for enforcement. In essence, the notification seeks to enforce provisions relating only to insolvency resolution process of corporate persons.

2.         Section 4 to section 32 [both inclusive] – Corporate Insolvency Resolution Process

Sections 4 to 32 (both inclusive) are comprised in Chapters I and II of Part II of the Code. Chapter I of Part II (sections 4 & 5) contains preliminary provisions while Chapter II of Part II (sections 6 to 32) provides for corporate insolvency resolution process. Such sections do not cover fast track corporate insolvency resolution process.

Section 4 limits the applicability of the Code to cases where the amount of default is a minimum of Rs. 1 lakh. The Central Government may, by way of notification, raise such minimum limit up to a maximum of Rs. 1 crore. Section 5 contains definitions of the words and expressions used in Part II of the Code (i.e. in context of the corporate insolvency resolution process).

The corporate insolvency resolution process as contained in sections 6 to 32 has been briefly stated as follows:

- There must be a debt, in respect of which the corporate debtor must have committed a default. The amount of default should be Rs. 1 lakh or more.

- A financial creditor (solely or jointly), an operational creditor, or a corporate applicant may file an application for initiation of corporate insolvency resolution process in respect of the corporate debtor to the adjudicating authority. In case of operational creditor, a pre-requirement is delivery of demand notice.

- The adjudicating authority admits or rejects the application.

- On admission of the application, the corporate insolvency resolution process commences.

- Moratorium commences, interim resolution professional is appointed, and public announcement is made.

- Committee of creditors is constituted by the interim resolution professional

- Resolution professional is appointed by the committee of creditors in its first meeting.

- Resolution professional prepares information memorandum.

- Resolution applicant prepares resolution plan on the basis of the information memorandum.

- The resolution plan is examined by the resolution professional, and approved by the committee of creditors.

- The resolution plan is approved by the adjudicating authority.

The corporate insolvency resolution process has to be complete within the default maximum period of 180 days, extendable by a further period of 90 days only once.

3.         Section 60 to section 77 [both inclusive] – Adjudicating Authority for Corporate Persons and Offences & Penalties

Sections 60 to 67 cover provisions relating to adjudicating authority for corporate persons, while sections 68 to 77 list out offences in relation to the processes of resolution and liquidation and penalties therefor. These constitute another set of necessary provisions to facilitate corporate insolvency resolution process.

4.   Section 198 – Condonation of Delay

The section deals with condonation of delays made by the Insolvency and Bankruptcy Board. The section is a non-obstante clause and provides that where the Board does not perform any act within the period specified under this Code, the relevant Adjudicating Authority may, for reasons to be recorded in writing, condone the delay.

5.   Section 231 – Bar of Jurisdiction

Section 231 bars the jurisdiction of any court in respect of any matter in which the adjudicating authority is empowered by, or under, this Code to pass any order. No injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by such adjudicating authority under this Code.

6.   Section 236 to section 238 [both inclusive] – Trial of Offences by Special Court, Appeal and Revision, and Overriding Effect of the Code

Section 236 provides for trial of offences under the Code by the Special Court established under Chapter XXVIII of the Companies Act, 2013. According to section 237, the High Court may exercise, so far as may be applicable, all the powers conferred by Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court, as if a Special Court within the local limits of the jurisdiction of the High Court were a Court of Session trying cases within the local limits of the jurisdiction of the High Court.

Section 238 emphasises on the overriding effect of the Code -- The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

7.   Clause (a) to clause (f) of sub-section (2) of section 239 – Power of Central Government to frame Rules under the Code

Section 239 (2) empowers the Central Government to frame rules in regard to the following (only notified part reproduced) –

(a) any other instrument which shall be a financial product under clause (15) of section 3;

(b) other accounting standards which shall be a financial debt under clause (d) of sub-section (8) of section 5;

(c) the form, the manner and the fee for making application before the Adjudicating Authority for initiating corporate insolvency resolution process by financial creditor under sub-section (2) of section 7;

(d) the form and manner in which demand notice may be made and the manner of delivery thereof to the corporate debtor under sub-section (1) of section 8;

(e) the form, the manner and the fee for making application before the Adjudicating Authority for initiating corporate insolvency resolution process by operational creditor under sub-section (2) of section 9;

(f) the form, the manner and the fee for making application before the Adjudicating Authority for initiating corporate insolvency resolution process by corporate applicant under sub-section (2) of section 10;”

Note that the Central Government has also issued the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 by way of Notification no. G.S.R. 1108(E) dated 30 November, 2016.

What is Missing?

The present notification misses out on one of the most crucial aspects in the corporate insolvency resolution process – avoidance of transactions. Sections 43 to 51 of the Code empower both the liquidator and the resolution professional to file applications to the adjudicating authority for avoidance of certain transactions, viz.

(i)   preferential transactions,

(ii)  undervalued transactions, and

(iii) extortionate credit transactions,

The resolution process may not be effectively carried out in the absence of these provisions.

The way ahead

In furtherance of the power conferred under section 240, the Board has issued the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 by way of Notification no. IBBI/2016-17/GN/REG004 dated 30 November, 2016.

Seeing the trend, it is evident that the Central Government is keen on implementing the Code in fast track mode and it is expected that the sections relating to avoidance of transactions will be notified soon.

- Shikha Bansal




[1] Read more: http://www.india-financing.com/images/Articles/SICA_bids_adieu.pdf
[2] http://www.mca.gov.in/Ministry/pdf/Notificationdated05.08.2016.pdf
[3] Read more: http://www.india-financing.com/images/Articles/7_sections_notified.pdf
[4] http://www.mca.gov.in/Ministry/pdf/Notification_22092016_1.pdf
[6] http://www.mca.gov.in/Ministry/pdf/Notification_01112016.pdf
[7] Read more: http://www.india-financing.com/images/Articles/Sections_notified_under_the_Bankruptcy_Code.pdf
[8] http://www.mca.gov.in/Ministry/pdf/Notification_17112016.pdf
[9] Read more: http://www.india-financing.com/images/Articles/Sections_notified_under_the_Code_4th_Tranche.pdf

1 comment:

Anonymous said...

So does that mean that both winding up under section 433 of CA 1956 and IRP are in place? Then which remedy to pursue?

Additionally, Government has also notified section 255 of Insolvency code on 15 November. Section 255 amend CA 13. Few provisions thereby amended deal with winding up of companies (section 271). Does that mean that winding up under new act is also enforced, that too without repealing winding up under CA 1956.