Cabinet Approves Amendments To Streamline Insolvency And Bankruptcy Code

The amendments are aimed at streamlining the corporate insolvency resolution process.
A gavel placed on a block for this arranged photograph (Source: Freepik)
A gavel placed on a block for this arranged photograph (Source: Freepik)
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The Union Cabinet has approved a second amendment to the Insolvency and Bankruptcy Code, 2016, that seeks to streamline the corporate insolvency resolution process and protect a successful resolution applicant from criminal proceedings against offences committed by previous managements or promoters of a corporate debtor.

The government has been amending the code in tandem with new developments and the problems arising in its implementation. The proposed amendment comes after the government had amended the code in August this year. The bill, which is yet to be tabled in the Parliament, will become a law after receiving approval from both of its houses and receiving Presidential assent.

Here are the key proposals of the bill:

Proposed Amendments

The Insolvency and Bankruptcy Code has been facing operational difficulties since its passage in 2016. The government has responded by making timely amendments in the code. As per a government notification, the amendments seek to:

  • Streamline the implementation of corporate insolvency resolution process and protect last-mile funding to boost investments.
  • Introduce additional threshold for triggering of CIRP by certain categories of financial creditors who are represented by an authorized representative. This, the bill states, will help in preventing frivolous CIRP.

Also Read: Government Expands Partial Credit Guarantee Scheme To Lower-Rated Assets

Ring-Fencing Against Criminal Proceedings

Criminal proceedings against offences committed by past managements or promoters of a company undergoing insolvency resolution can affect the success of a resolution plan. The code in its present form is silent about the impact of past managements’ offences on a corporate debtor after emerging from a resolution process.

For instance, JSW Steel Ltd. had to approach the National Company Law Tribunal to seek extinguishment of all present and future liabilities on account of criminal investigations against Bhushan Power and Steel, contending that an absence of any such protection would jeopardise the feasibility and viability of its resolution plan.

The amendment proposes to address this shortcoming by ring-fencing a corporate debtor after its resolution from criminal proceedings arising from offences committed by the previous management. This amendment, according to experts, will remove the obstacle in successful resolution of a corporate debtor.

The proposed changes, especially those related to ring-fencing, should help restore investor and banker confidence in the IBC process. The Government has rightly enhanced the focus on ensuring sustenance and recovery of businesses from bankruptcy, which is essential to sustain the economy and drive growth. Additional focus is now needed on boosting IBC related infrastructure, to hasten the recovery process.
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

Prohibiting Cancellation Or Termination of Licenses And Permits

Companies rely on licences, permits and clearances granted by the government or a regulatory body to operate in a regulated sector. Such permits and clearances are subject to periodic compliances, failing which, the regulator cancels or revokes such licences. For instance, telecom companies rely on spectrum and telecom licences granted by the Telecom Regulatory Authority of India, while aviation companies require necessary approvals from the Directorate General of Civil Aviation.

Any cancellation, suspension or non renewal of such license or permit can derail the resolution process of a corporate debtor. Recently the Mumbai Bench of the NCLT rejected the telecom department’s move to cancel Aircel’s telecom licence as it could derail its recovery process.

The proposed amendment seeks to ensure that a corporate debtor continues as a going concern. It aims to do so by an amendment in the Code to clarify that the licenses, permits etc. cannot be terminated or suspended during the moratorium period. Experts told BloombergQuint that this will help those ailing sectors that rely on permits and licenses.

The proposed amendment is for clarification. During the moratorium, a corporate debtor has to be kept as a going concern by the resolution professional and creditors. Some of the licenses were getting suspended as the moratorium did not expressly prohibit so. The amendment will help in smooth operation during resolution period and help companies which rely on licenses like aviation companies etc. 
Sapan Gupta, National Practice Head-Banking and Finance, Shardul Amarchand Mangaldas

Besides this, the Bill seeks to amend provisions relating to insolvency commencement date and powers of central government to notify financial service providers.

Also Read: How To Sign Up For BloombergQuint Story Notifications

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