The Insolvency and Bankruptcy Code, 2016 was enacted to provide a time-bound process to resolve insolvency among companies and individuals. Insolvency is a situation where an individual or company is unable to repay their outstanding debt. Last month, the government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 amending certain provisions of the Code. The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018, which replaces this Ordinance, was introduced in Lok Sabha last week and is scheduled to be passed in the ongoing monsoon session of Parliament. In light of this, we discuss some of the changes being proposed under the Bill and possible implications of such changes.
What was the need for amending the Code?
In November 2017, the Insolvency Law Committee was set up to review the Code, identify issues in its implementation, and suggest changes. The Committee submitted its report in March 2018. It made several recommendations, such as treating allottees under a real estate project as financial creditors, exempting micro, small and medium enterprises from certain provisions of the Code, reducing voting thresholds of the committee of creditors, among others. Subsequently, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, was promulgated on June 6, 2018, incorporating these recommendations.
What amendments have been proposed regarding real estate allottees?
The Code defines a financial creditor as anyone who has extended any kind of loan or financial credit to the debtor. The Bill clarifies that an allottee under a real estate project (a buyer of an under-construction residential or commercial property) will be considered as a financial creditor. These allottees will be represented on the committee of creditors by an authorised representative who will vote on their behalf.
This committee is responsible for taking key decisions related to the resolution process, such as appointing the resolution professional, and approving the resolution plan to be submitted to the National Company Law Tribunal (NCLT). It also implies that real estate allottees can initiate a corporate insolvency resolution process against the debtor.
Can the amount raised by real estate allottees be considered as financial debt?
The Insolvency Law Committee (2017) had noted that the amount paid by allottees under a real estate project is a means of raising finance for the project, and hence would classify as financial debt. It had also noted that, in certain cases, allottees provide more money towards a real estate project than banks. The Bill provides that the amount raised from allottees during the sale of a real estate project would have the commercial effect of a borrowing, and therefore be considered as a financial debt for the real estate company (or the debtor).
However, it may be argued that the money raised from allottees under a real estate project is an advance payment for a future asset (or the property allotted to them). It is not an explicit loan given to the developer against receipt of interest, or similar consideration for the time value of money, and therefore may not qualify as financial debt.
Do the amendments affect the priority of real estate allottees in the waterfall under liquidation?
During the corporate insolvency resolution process, a committee of creditors (comprising of all financial creditors) may choose to: (i) resolve the debtor company, or (ii) liquidate (sell) the debtor’s assets to repay loans. If no decision is made by the committee within the prescribed time period, the debtor’s assets are liquidated to repay the debt. In case of liquidation, secured creditors are paid first after payment of the resolution fees and other resolution costs. Secured creditors are those whose loans are backed by collateral (security). This is followed by payment of employee wages, and then payment to all the unsecured creditors.
While the Bill classifies allottees as financial creditors, it does not specify whether they would be treated as secured or unsecured creditors. Therefore, their position in the order of priority is not clear.
What amendments have been proposed regarding Micro, Small, and Medium Enterprises (MSMEs)?
Earlier this year, the Code was amended to prohibit certain persons from submitting a resolution plan. These include: (i) wilful defaulters, (ii) promoters or management of the company if it has an outstanding non-performing asset (NPA) for over a year, and (iii) disqualified directors, among others. Further, it barred the sale of property of a defaulter to such persons during liquidation. One of the concerns raised was that in case of some MSMEs, the promoter may be the only person submitting a plan to revive the company. In such cases, the defaulting firm will go into liquidation even if there could have been a viable resolution plan.
The Bill amends the criteria which prohibits certain persons from submitting a resolution plan. For example, the Code prohibits a person from being a resolution applicant if his account has been identified as a NPA for more than a year. The Bill provides that this criterion will not apply if such an applicant is a financial entity, and is not a related party to the debtor (with certain exceptions). Further, if the NPA was acquired under a resolution plan under this Code, then this criterion will not apply for a period of three years (instead of one). Secondly, the Code also bars a guarantor of a defaulter from being an applicant. The Bill specifies that such a bar will apply if such guarantee has been invoked by the creditor and remains unpaid.
In addition to amending these criteria, the Bill also states that the ineligibility criteria for resolution applicants regarding NPAs and guarantors will not be applicable to persons applying for resolution of MSMEs. The central government may, in public interest, modify or remove other provisions of the Code while applying them to MSMEs.
What are some of the other key changes being proposed?
The Bill also makes certain changes to the procedures under the Code. Under the Code, all decisions of the committee of creditors have to be taken by a 75% majority of the financial creditors. The Bill lowers this threshold to 51%. For certain key decisions, such as appointment of a resolution professional, approving the resolution plan, and making structural changes to the company, the voting threshold has been reduced from 75% to 66%.
The Bill also provides for withdrawal of a resolution application, after the resolution process has been initiated with the NCLT. Such withdrawal will have to be approved by a 90% vote of the committee of creditors.
On June 13, 2022, the West Bengal government passed a Bill to replace the Governor with the Chief Minister, as the Chancellor of 31 state public universities (such as Calcutta University, Jadavpur University). As per the All India Survey on Higher Education (2019-20), state public universities provide higher education to almost 85% of all students enrolled in higher education in India. In this blog, we discuss the role of the Governor in state public universities.
What is the role of the Chancellor in public universities?
State public universities are established through laws passed by state legislatures. In most laws the Governor has been designated as the Chancellor of these universities. The Chancellor functions as the head of public universities, and appoints the Vice-Chancellor of the university. Further, the Chancellor can declare invalid, any university proceeding which is not as per existing laws. In some states (such as Bihar, Gujarat, and Jharkhand), the Chancellor has the power to conduct inspections in the university. The Chancellor also presides over the convocation of the university, and confirms proposals for conferring honorary degrees. This is different in Telangana, where the Chancellor is appointed by the state government.
The Chancellor presides over the meetings of various university bodies (such as the Court/Senate of the university). The Court/Senate decides on matters of general policy related to the development of the university, such as: (i) establishing new university departments, (ii) conferring and withdrawing degrees and titles, and (iii) instituting fellowships.
The West Bengal University Laws (Amendment) Bill, 2022 designates the Chief Minister of West Bengal as the Chancellor of the 31 public universities in the state. Further, the Chief Minister (instead of the Governor) will be the head of these universities, and preside over the meetings of university bodies (such as Court/Senate).
Does the Governor have discretion in his capacity as Chancellor?
In 1997, the Supreme Court held that the Governor was not bound by the aid and advice of the Council of Ministers, while discharging duties of a separate statutory office (such as the Chancellor).
The Sarkaria and Puunchi Commission also dealt with the role of the Governor in educational institutions. Both Commissions concurred that while discharging statutory functions, the Governor is not legally bound by the aid and advice of the Council of Ministers. However, it may be advantageous for the Governor to consult the concerned Minister. The Sarkaria Commission recommended that state legislatures should avoid conferring statutory powers on the Governor, which were not envisaged by the Constitution. The Puunchi Commission observed that the role of Governor as the Chancellor may expose the office to controversies or public criticism. Hence, the role of the Governor should be restricted to constitutional provisions only. The Statement of Objects and Reasons of the West Bengal University Laws (Amendment) Bill, 2022 also mentions this recommendation given by the Puunchi Commission.
Recently, some states have taken steps to reduce the oversight of the Governor in state public universities. In April 2022, the Tamil Nadu Legislative Assembly passed two Bills, to transfer the power of appointing the Vice-Chancellor (in public universities) from the Governor, to the state government. As of June 8, 2022, these Bills have not received the Governor’s assent.
In 2021, Maharashtra amended the process to appoint the Vice Chancellor of state public universities. Prior to the amendment, a Search Committee forwarded a panel of at least five names to the Chancellor (who is the Governor). The Chancellor could then appoint one of the persons from the suggested panel as Vice-Chancellor, or ask for a fresh panel of names to be recommended. The 2021 amendment mandated the Search Committee to first forward the panel of names to the state government, which would recommend a panel of two names (from the original panel) to the Chancellor. The Chancellor must appoint one of the two names from the panel as Vice-Chancellor within thirty days. As per the amendment, the Chancellor has no option of asking for a fresh panel of names to be recommended.