IBC Ordinance Ushers In Several Changes To Help Homebuyers, MSMEs And Process Management

The many expected and unexpected changes to the IBC via an ordinance.

A construction worker stands on the construction site of a housing block in Noida (Photographer: Sanjit Das/Bloomberg)  
A construction worker stands on the construction site of a housing block in Noida (Photographer: Sanjit Das/Bloomberg)  

The Insolvency and Bankruptcy Code, 2016 stands amended via the promulgation of an ordinance and the changes are many, some unexpected.

As recommended by the IBC Committee, homebuyers have been recognised as financial creditors. This gives them due representation in the Committee of Creditors (CoC) and makes them an integral part of the decision making process, said a government statement detailing the ordinance-led changes.

Security holders, deposit holders, all other classes of financial creditors that exceed a certain number will also get representation on the CoC. Such financial creditors can participate, through authorized representation, in CoC meetings.

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The ordinance has also granted Micro, Small and Medium Sector Enterprises special dispensation under the IBC. The first benefit is that promoters of MSMEs can bid for their companies as long as they are not wilful defaulters and do not attract other disqualifications not related to default. An amendment to the IBC late last year, Section 29A, barred promoters of defaulting assets from bidding for their assets.

The ordinance has also permitted the withdrawal of an insolvency application but only if approved by 90 percent vote share of the CoC. The withdrawal is permissible only before publication of notice inviting Expressions of Interest. No withdrawal will be permitted after the commercial process of EoIs and bids commences, said the statement.

In order to encourage resolution versus liquidation, the CoC voting threshold has been brought down to 66 percent from 75 percent for all major decisions such as approval of resolution plan, extension of insolvency period etc. The voting threshold for routine decisions has been reduced to 51 percent.

The ordinance also attempts to bring more clarity by laying down mandatory timelines, processes and procedures for corporate insolvency resolution process. Though this will be done via regulations.

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“Some of the specific issues that would be addressed include non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value of assets,” said the statement.

Further, Section 29(A) has been fine-tuned to exempt pure play financial entities from being disqualified on account of NPA. Also, NPA acquired under Insolvency Code shall not disqualify an entity for the next three years.

Successful resolution applicants will get a minimum one-year grace period to fulfill various statutory obligations.

The much litigated issue of enforcement of guarantees has also been dealt with. Moratorium period will not apply to enforcement of guarantees. Moratorium period is the period between the initiation and termination of insolvency proceedings where all other legal proceedings in relation to that company and its assets stand abated.

Finally, corporate debtors who want to themselves trigger insolvency will need shareholders approval via special resolution.

Watch this conversation with Sapan Gupta, head of banking practice at Shardul Amarchand Mangaldas.