Insolvency and Bankruptcy Code Amendment Bill Passed By Parliament

Insolvency and Bankruptcy Code Amendment Bill Passed By Parliament

Insolvency and Bankruptcy Code Amendment Bill Passed By Parliament

Parliament recently had passed the Insolvency and Bankruptcy Code (Amendment) Bill 2019, by the Minister of Finance, Nirmala Sitharaman, on 24th July 2019. The Bill amended the Insolvency and Bankruptcy Code, 2016.  The Code gives a time-bound procedure for resolving insolvency in corporations and among individuals.  Insolvency is a state where individuals or corporations are not capable to repay their outstanding dues. 

The Bill seeks out to bring in clarity relating to the preference of secured financial creditors over operational creditors in the matter of distribution of assets of the corporate debtor.

National Company Law Tribunal (NCLT)  

Nirmala Sitharman, the Union Minister for Finance and Corporate Affairs, had stated that this clarification was required considering the recent decision of National Company Law Tribunal (NCLT) in the matter of the Essar Steel which approved operational creditors’ equal status as lenders in the distribution of the bid amount of resolution plan.

The NCLAT in the mentioned case modified the resolution plans approved through the Committee of Creditors on the basis that it gave a raw deal to the operational creditors.

Expressing that such development would erode the original intent of the Code, the Central Government proposed the amendment to give committee of creditors of a loan defaulting corporation explicit authority over the distribution of proceeds in the resolution procedure. 

Section 31(1) of the Code is required to be amended to clarify that the resolution plan approved through the Adjudicating Authority would also be binding on the Central Government, any State Government or any local authority.

The amendment stated that the order of priority in the distribution of liquidation assets are required to be maintained in case of distribution of bid amount of resolution plan. This is required to be completed by inserting the words "the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor" in Section 30(4) of the IBC. 

NCLAT had ruled, in the Essar case, that the 'waterfall mechanism' under Section 53 of IBC is only applicable towards the distribution of proceeds from liquidation and not to resolution bids.

To safeguard the operational creditors’ interests, the Bill also stated that they must be paid the higher amongst the amounts receivable under liquidation, as well as the amount receivable under a resolution plan if such sums were distributed under the same order of priority as in Section 53.

Moreover, an explanation is introduced to the definition of "resolution plan" in Section 5(26) to explain and clarify that a resolution plan of the corporate debtor as a going concern might consist of the provisions for "corporate restructuring, including by way of merger, amalgamation, and demerger".

Regarding the voting power of a representative of the class of financial creditors, the Bill stated that such a representative would vote based on the decision taken through a majority of the voting share of the creditors that they represent.

In case an application has not been admitted or rejected within 14 days by the Adjudicating Authority, it would provide the reasons in writing for the same, according to the amendment proposed to Section 7(4).

The amendment had also provided a new deadline of 330 days for the completion of the resolution process. Earlier it was 270 days.

Focus on revival

Nirmala Sitharaman had also stated and made it clear that the IBC was not looking to impose corporations into liquidation, however, it focused on their revival and continuing as going issues.

She stated that not allowing corporations to die is the motive behind IBC. If there is any prospect of the corporation getting revived, the solution is not to go to liquidation, but make certain it is going concern.

The Bill addressed three concerns. Firstly, it strengthens provisions relating to time-limits.  Secondly, it states the minimum payouts towards operational creditors in any resolution plan.  Thirdly, it also states how the representative of a group of financial creditors (like home-buyers) should vote.

Resolution plan

The Code provides that the resolution plan should make certain that the operational creditors receive a sum which should not be lesser than the sum they shall receive in case of liquidation.

The Bill amended this to offer that the sums to be paid to the operational creditor must be the higher of: 

•    Sums receivable under liquidation.

•    The sums receivable under a resolution plan, if such sums were distributed under the same order of priority (as for liquidation).  

For instance, if the default were for Rs 1,000 crore and the resolution professional recovered Rs 800 crore, the operational creditor should at least get an amount which they should have received if Rs 800 crore has been received through liquidation proceeds.

Furthermore, the Bill stated that this provision shall apply to insolvency procedures:

•    That has not been approved or rejected through the National Company Law Tribunal (NCLT).

•    That has been appealed towards the National Company Appellate Tribunal or Supreme Court.

•    Where legal proceedings were initiated in any court against the decision of the NCLT.

Initiation of the resolution procedure

As per the Code, the NCLT should determine the existence of default within 14 days of receiving a resolution application.  Depending on its findings, NCLT might accept or reject the application.  The Bill stated that in case the NCLT doesn’t find the existence of default and has not passed an order within 14 days, it should record its reasons in writing.

Time-limit for the resolution process

The Code stated that the insolvency resolution procedure should be completed within 180 days, extendable by a period of up to 90 days.  The Bill added that the resolution procedure should be completed within 330 days.  This consists of time for any extension granted and the time taken in legal proceedings concerning the procedure.  On the enactment of the Bill, if any matter is pending for over 330 days, the Bill stated it would be resolved within 90 days.

The Representative of financial creditors

The Code states that, in few matters, such as when the dues are owed to a class of creditors beyond a specified number, the financial creditors shall be represented on the committee of creditors through an authorized representative.  These representatives would vote for the financial creditors according to instructions received from them.  The Bill stated that such a representative would vote based on the resolution taken by a majority of the voting share of the creditors that they represent.


The bill has been passed by Rajya Sabha, and it could be said that with the implementation of the Code, there would no longer availability of a defaulter’s paradise.


eStartIndia Team

Leave a Comment

Previous Comments

Test Comment

Related Blogs