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President approves promulgation of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018

Jun 6, 2018 17:48 IST
President approves promulgation of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018

President Ram Nath Kovind on June 6, 2018 gave approval to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018.

The Ordinance provides significant relief to home buyers by recognising them as financial creditors.  

Homebuyers: Biggest beneficiaries of the ordinance

• From now on, home buyers will have representation in the Committee of Creditors and will be an integral part of the decision making process.  

• Homebuyers will have the right to initiate a resolution process against the bankrupt real estate companies and get their money back.

• It will also enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers.   

• The biggest beneficiaries of this ordinance will be homebuyers as the present version of the IBC does not consider homebuyers as secured creditors; they have no right to initiate a resolution process if a real estate company goes bankrupt.

Micro, Small and Medium Sector Enterprises (MSME): Another major beneficiary

 

  • Another major beneficiary of the ordinance will be the Micro, Small and Medium Sector Enterprises (MSME), which form the backbone of the Indian economy as the biggest employer. 
  • Considering the importance of MSME Sector in terms of employment generation, the Ordinance empowers the Central Government to provide them with a special dispensation under the IBC. 
  • The ordinance does not disqualify the promoter to bid for his enterprise undergoing Corporate Insolvency Resolution Process (CIRP), provided he is not a willful defaulter and does not attract other disqualifications not related to default. 
  • It also empowers the Central Government to allow further exemptions with respect to the MSME Sector in public interest, if required.
  • The Micro Small and Medium Enterprises (MSMEs) will now be exempted from all conditions. As per Section 29 of the IBC Act, a person or a company suffering disqualification, can't participate in the resolution process.


Insolvency and Bankruptcy Code (Amendment) Ordinance 2018

• The committee of creditors’s voting rights of resolution plans will be limited to 66 percent from earlier threshold of 75 percent, a move that will help speed up the resolution process.

• In order to facilitate the corporate debtor to continue as a going concern during the CIRP, the voting threshold for routine decisions has been reduced to 51 percent.

• Withdrawal of an insolvency application will be allowed, if 90 percent of the creditors agree.

• The Ordinance also provides for a mechanism to allow participation of security holders, deposit holders and all other classes of financial creditors that exceed a certain number, in the meetings of the Committee of Creditors.

• Section 29(A) of the IBC, 2016 has been amended to exempt pure play financial entities from being disqualified on account of non-performing assets (NPA).  

• Taking into account the wide range of disqualifications contained in Section 29(A) of the Code, the Ordinance provides that the Resolution Applicant shall submit an affidavit certifying its eligibility to bid.

• Promoters of companies with turnover of up to Rs 250 crore will be allowed to bid. Earlier, they were barred from bidding as the government feared that they will walk away with the stressed assets at a discount.

• The ordinance proposes to facilitate implementation of the resolution plan by the successful bidder.

• It provides a year time to the Resolution Applicant to obtain necessary statutory clearances from central, state and other authorities.

• The other changes brought about by the Ordinance include - non-applicability of moratorium period to enforcement of guarantee; and liberalising terms and conditions of interim finance to facilitate financing of corporate debtor.

Strict procedure of withdrawal once a case has been registered under IBC 2016


• To protect the sanctity of the Corporate Insolvency Resolution Process (CIRP), the Ordinance lays down strict procedure if an applicant wants to withdraw a case after its admission under IBC 2016.

• Such withdrawal would be permissible only with the approval of the Committee of Creditors with 90 percent of the voting share.  

• There can be no withdrawal, once the commercial process of inviting Expressions of Interest (EoI) and bids commences.

Significance

The Ordinance is expected to further strengthen the Insolvency Resolution Framework in the country and produce better outcomes in terms of resolution as opposed to liquidation, time taken, cost incurred and recovery rate.

A sigh of relief for homebuyers, Union Cabinet approves ordinance to amend Insolvency and Bankruptcy Code

 

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