Lok Sabha passes Insolvency and Bankruptcy Code (Amendment) Bill, 2018

August 1, 2018

Lok Sabha has passed Insolvency and Bankruptcy Code (Amendment) Bill, 2018 to bring relief to the home buyers and Micro, Small and Medium Enterprises (MSMEs). The Bill replaces ordinance promulgated in this regard and amends the Insolvency and Bankruptcy Code, 2016.

Background

Insolvency and Bankruptcy Code (IBC), 2016 provides time-bound process to resolution of insolvency among companies and individuals. Insolvency is situation where individual or company is unable to repay their outstanding debt. Government in November 2017 had set up Insolvency Law Committee to review IBC and identify issues in its implementation and suggest changes. The Committee had made several recommendations such as exempting MSMEs from certain provisions of IBC, treating allottees under real estate project as financial creditors, reducing voting thresholds of committee of creditors (CoC), among others. Subsequently, President had promulgated Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 in June 2018 after approval of Central Government.

Key Features of Bill

Status of allottees: The Bill clarifies that allottee under real estate project i.e. buyer of under-construction residential or commercial property will be considered as financial creditor, as amount raised from allottees for financing real estate project has commercial effect of a borrowing.
Representative of financial creditors: It specifies that in certain cases, such as when debt is owed to a class of creditors, the financial creditors will be represented on committee of creditors by authorised representative. These representatives will vote on behalf of financial creditors as per prior instructions received from them.
Voting threshold of committee of creditors: The voting threshold for decisions of committee of creditors has been lowered from 75% to 51%. For certain key decisions of committee like appointment of resolution professional, approval of the resolution plan and increasing time limit for insolvency resolution process threshold has been reduced from 75% to 66%.
Ineligibility to be resolution applicant: Bill amends criteria which prohibits certain persons from submitting resolution plan. It provides that this criterion will not apply if such applicant is financial entity and not related party to debtor with certain exceptions. It specifies that such bar will apply if such guarantee has been invoked by creditor and remains unpaid.
Applicability of Code to Micro, Small, and Medium Enterprises (MSMEs): The Bill specifies that ineligibility criteria for resolution applicants regarding Non Performing Assets (NPAs) and guarantors will not be applicable to persons applying for resolution of MSMEs. It empowers Central government in public interest to modify or remove other provisions of IBC while applying them to MSMEs.
Withdrawal of submitted applications: The Bill increases vote required for withdrawal resolution application from National Company Law Tribunal (NCLT) after such process has been initiated by 90% vote of committee of creditors.