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Supreme Court upholds constitutional validity of Insolvency and Bankruptcy Code

A Bench headed by Justice R.F. Nariman upheld the constitutional validity of the code “in its entirety”. However, the apex court said that related parties in the Act should mean a person connected with the business.

Jan 25, 2019 17:14 IST
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The Supreme Court on January 25, 2019 upheld the constitutional validity of the Insolvency and Bankruptcy Code (IBC).

A Bench headed by Justice R.F. Nariman upheld the constitutional validity of the code “in its entirety”. However, the apex court said that related parties in the Act should mean a person connected with the business.

The Bench disposed of a batch of pleas filed by companies challenging various provisions of the IBC.

Note

Insolvency is a situation where an individual or company is unable to repay their outstanding debt to creditors.  A bankrupt entity is a debtor who has been declared as bankrupt by an adjudicating authority.

As per the law, the National Company Law Tribunal (NCLT) is the adjudicating authority for companies and limited liability partnerships. The Debt Recovery Tribunal (DRT) is the adjudicating authority for individuals and partnership firms.

In India, the insolvent or bankrupt entities are dealt on the basis of bankruptcy laws. Currently, Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018 is pending for its passage in the parliament. The Bill seeks to replace the Insolvency and Bankruptcy Code (Amendment) Ordinance 2018.

Prior to this legislation, Insolvency and Bankruptcy Code, 2016 was applicable for resolution of bankrupt companies and individuals.

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.

Parliament passes Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018

IBBI amends Bankruptcy Norms, notifies procedures for home buyers under insolvency proceedings

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

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