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.
The elections for the next Vice-President of India are underway today. The current Vice President Dr. Hamid Ansari will complete his second five-year term on August 10, which is in a few days. While the BJP-led NDA’s candidate is Mr. Venkaiah Naidu, Dr. Gopalkrishna Gandhi is the joint candidate fronted by 18 opposition parties led by the INC. In this post, we take a closer look at the constitutional mandate and role of the Vice-President of India and how the elections for the post will play out today.
Constitutional mandate as Vice President
The Vice-President is the second-highest constitutional office in India. He acts as the President in the absence of the incumbent President, and is the ex officio Chairman of Rajya Sabha. As an indication of his bipartisanship and apolitical character, the Vice-President does not hold membership of any political party or any other office of profit. Further, given his constitutional stature, the statements given by the Vice President assume national significance. The outgoing Vice President’s statements on issues like press freedom and welfare of minority communities led to several media debates and attracted widespread attention.
Vice-President’s role as Chairman of the Rajya Sabha
As Chairman of Rajya Sabha, the Vice President is the final authority on the interpretation of the Constitution and the Rules of Procedure for all house-related matters. His rulings constitute binding precedent. He also determines whether a Rajya Sabha member stands to be disqualified on grounds of defection. Such powers make him an important stakeholder in the functioning of our parliamentary democracy.
The Vice President is also vested with powers to improve the functioning of the Upper House. There have been several instances where the current Vice President has used his powers to address issues ranging from improving the productivity of question hour, reducing prolonged disruptions, maintaining decorum in the House, to facilitating discussion on issues of national importance.
Addressing disruptions: In March 2010, the Vice President ordered seven MPs to be evicted from the House for causing disruptions during the discussion and passage of the Women’s Reservation Bill. More recently, in December 2015, the Vice President called for an all-party meeting during the last leg of the then ongoing Winter Session to discuss the matter of continuous disruptions in the House. The remaining three days of the session after the all-party meet recorded 79% productivity, while the House had recorded overall productivity of 51% that session.
Functioning of Question Hour: In another instance, in November 2014, the Vice President issued a direction to conduct question hour from 12 noon to 1 pm instead of the originally allocated first hour of the day. This was seen as an attempt to address the issue of low productivity of question hour mostly due to disruptions at the start of the day. However, question hour productivity has not shown any significant improvement yet, with continuing disruptions.
Parliamentary Privilege: Parliamentary privilege refers to rights and immunity enjoyed by Parliament and MPs, which may be necessary to effectively discharge their constitutional functions. When disregarded, the offence is called a breach of privilege and is punishable under law. The Chairman is the guardian of these privileges and can also issue warrants to execute the orders of the House, where necessary. In 1967, one person was held to be in contempt of Rajya Sabha for throwing leaflets from the visitors’ gallery of the House. The then Vice President, in accordance with the resolution of the House, had sentenced the person to simple imprisonment, till the conclusion of that session.
The Chairman’s consent is required to raise a question of breach of privilege. He also has the discretion whether to refer it to the Privileges Committee, and whether to accept the committee’s recommendations. In October 2015, the current Vice President had referred the matter of a member’s controversial “terrorists in Parliament” remark to the Privileges Committee upon receiving complaints from several opposition MPs.
Role in Parliamentary Committees and other institutions
Parliamentary committees review proposed laws, oversee activities of the executive, and scrutinise government’s expenditure. The Vice President nominates members to various Parliamentary Committees, appoints their Chairmen and issues directions to them. The Vice President also nominates members of the Rajya Sabha on various bodies such as the Haj Committee, the Institute of Constitutional and Parliamentary Studies, Courts of several universities such as JNU, etc. He is also on the three-member Committee which nominates the Chairman of the Press Council of India.
So, how is the Vice President elected?
Unlike Presidential elections, MLAs do not have a vote in these elections. Dr. B R Ambedkar had explained why during the constituent assembly debates: “The President is the Head of the State and his powers extend both to the administration by the centre as well as of the states… But when we come to the Vice-President, his normal functions are merely to preside over the Council of States. It is only on a rare occasion, and that too for a temporary period, that he may be called upon to assume the duties of a President”.
Therefore, the Electoral College for the Vice- Presidential elections consists of all 790 MPs. The elections are conducted using the system of single transferable voting that results in (approximately) proportional representation. The voting is done through secret ballot implying that parties cannot issue whips to their MPs and anti-defection laws do not apply.
Each voter has one vote with the same value of 1. Every voter can mark as many preferences, as there are candidates contesting the election. It is necessary for at least the first preference to be marked. A candidate needs to win a required number of votes (or the quota) to be elected. If no one achieves the required quota after the first round of counting the first preference votes, the candidate with the lowest votes is eliminated. His votes are then transferred to the second preference mentioned (if any) on the votes he received. If no one achieves the required quota again, the process is repeated till either:
The upcoming Vice Presidential elections
Let us now determine the quota required for victory in today’s election. The total value of votes of the electoral college is divided by two, and one is added (to ensure a majority) to the quotient to determine the quota. Hence, the quota is calculated as:
Quota = 790/2 + 1 = 395 + 1= 396
The candidate who gets 396 votes will win the election. If no candidate gets to this mark, the second and further preferences may be counted until the mark is reached or all candidates, but one, are eliminated.
We know the number of seats held by each party in Parliament. Let us assume that all MPs vote along their party line. The position of the NDA and UPA is depicted in the figure below at the two ends of the chart. All other major parties and independents are marked in the middle.
We observe that, while the BJP falls short of the quota by 58 votes, the shortfall can be overcome if NDA allies TDP, Shiv Sena, Shiromani Akali Dal, LJP and PDP support its candidate.
With the voting taking place this morning, the outcome and results will become clear by later today. It is hoped that the new Vice President will uphold the twin constitutional mandates as the second highest constitutional functionary and the Chairman of Rajya Sabha, just as his distinguished predecessors have done.
