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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.
Indiscipline and disruptions in Parliament are much talked about issues. Not only are disruptions a waste of Parliament's valuable time, these significantly taint the image of this esteemed institution. Commotion in Rajya Sabha over the introduction of Women's Reservation Bill and the subsequent suspension of 7 MPs has brought this issue back to the forefront. We thought it might be useful to research and highlight instances in the past when the House had had to deal with similar situations. According to the Rules of Conduct and Parliamentary Etiquette of the Rajya Sabha, "The House has the right to punish its members for their misconduct whether in the House or outside it. In cases of misconduct or contempt committed by its members, the House can impose a punishment in the form of admonition, reprimand, withdrawal from the House, suspension from the service of the House, imprisonment and expulsion from the House." Mild offences are punished by admonition or reprimand (reprimand being the more serious of the two). Withdrawal from the House is demanded in the case of gross misconduct. 'Persistent and wilful obstructions' lead the Chairman to name and subsequently move a motion for suspension of the member. A member can be suspended, at the maximum, for the remainder of the session only. In an extreme case of misconduct, the House may expel a member from the House. According to a comment in the above rule book, "The purpose of expulsion is not so much disciplinary as remedial, not so much to punish members as to rid the House of persons who are unfit for membership." There have been several instances in the past when the Parliament has exercised its right to punish members. We pulled together a few instances: Rajya Sabha
Unruly behaviour – Some instances | |
3-Sep-62 | Shri Godey Murahari was suspended for the remainder of the session on 3 Septemebr 1962. He was removed by the Marshal of the House |
25-Jul-66 | Shri Raj Narain and Shri Godey Murahari were suspended for one week by two separate motions moved on 25 July 1966, by the Leader of the House (Shri M.C. Chagla) and adopted by the House. After they refused to withdraw, they were removed by the Marshal of the House. Next day, the Chairman expressed his distress and leaders of parties expressed their regret at the incident |
12-Aug-71 | The Minister of Parliamentary Affairs (Shri Om Mehta) moved a motion on 12 August 1971, for the suspension of Shri Raj Narain for the remainder of the session. The motion was adopted. Shri Raj Narain, on refusing to withdraw, was removed by the Marshal of the House |
Source: Rajya Sabha, Rules of Conduct and Parliamentary Etiquette
Expulsion – All instances (three in total) | |
15-Nov-76 | Shri Subramanian Swamy was expelled on 15 November 1976 on the basis of the Report of the Committee appointed to investigate his conduct and activities. The Committee found his conduct derogatory to the dignity of the House and its members and inconsistent with the standards which the House expects from its members |
23-Dec-05 | Dr. Chhattrapal Singh Lodha was expelled on 23 December 2005, for his conduct being derogatory to the dignity of the House and inconsistent with the Code of Conduct, consequent on the adoption of a motion by the House agreeing with the recommendation contained in the Seventh Report of the Committee on Ethics |
21-Mar-06 | Dr. Swami Sakshi Ji Maharaj was expelled on 21 March 2006, for his gross misconduct which brought the House and its members into disrepute and contravened the Code of Conduct for members of Rajya Sabha, consequent on the adoption of a motion by the House agreeing with the recommendation of the Committee on Ethics contained in its Eighth Report |
Source: Rajya Sabha, Rules of Conduct and Parliamentary Etiquette
Lok Sabha
Unruly behaviour – Some instances | |
15-Mar-89 | Commotion in the House over the Thakkar Commission report (Report of Justice Thakkar Commission of Inquiry on the Assassination of the Late Prime Minister Smt. Indira Gandhi; revelations published in Indian Express before report tabled in Parliament) led to 63 MPs being suspended for a week. An opposition member belonging to the Janata Group (Syed Shahabuddin) who had not been suspended, submitted that he also be treated as suspended and walked out of the House. Three other members (GM Banatwalla, MS Gill and Shaminder Singh) also walked out in protest. |
20-Jul-89 | Demand for resignation of Govt. because of the adverse remarks made against it by the CAG in his report on Defence Services for the year 1988-89 saw commotion in the House. Satyagopal Misra dislodged microphone placed before the Chair and threw it in the pit of the House. (Sheila Dikshit was the Minister of State for Parliamentary Affairs). No member was suspended. |
Source: Subhash Kashyap, Parliamentary Procedure (Second Edition)