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 March 22, Bihar registered its first two cases of the new coronavirus disease (COVID-19), one of whom died the same day. Since then, the number of cases has increased steadily. As of April 19, Bihar has 86 confirmed cases of COVID-19, of which 47 are active cases and 37 have recovered. 33 new cases have been registered since last week. One more death has been registered since March 22.
Given the highly contagious nature of the disease, on March 22, the Government of Bihar announced a state-wide lockdown till March 31. This was followed by a nation-wide lockdown enforced by the central government between March 25 and April 14, now extended up to May 3. During the lockdown, severe restrictions have been placed on the movement of individuals. Establishments have remained closed, except those providing essential goods and services. Restrictions are likely to be relaxed in less-affected districts post-April 20.
In this blog, we look at key measures taken by the state government in response to COVID-19 so far.
Early-stage: screening of travellers, awareness on precautionary measures
The initial responses from the state government were aimed towards: (i) raising awareness about precautionary measures to be taken against the disease, and (ii) screening of international travellers. In this context, on February 25, the Bihar State Health Society issued advisories for: (i) measures to be taken in schools and colleges, and (ii) reporting of airline passengers and tourists with symptomatic cases to the district health administration. On March 11, 104 Call Centre was designated as the COVID-19 control room, to address public queries related to the disease.
Prior to lockdown: limiting mass gatherings, mobilisation of the public health system
Limiting mass gatherings
Between March 13 and March 18, the state government issued orders to shut down various premises until March 31. These include Anganwadi centres, educational institutions, and commercial establishments such as cinema halls, parks, and shopping malls. The government staff was directed to come to office on alternate days. Gathering of more than 50 persons at one place was prohibited including any mass family gathering (except marriages). The transport department was asked to restrict both public and private transport.
Healthcare measures
On March 13, the government issued directions to: (i) ensure availability of 100 extra ventilators in the government hospitals, (ii) arrange for testing of COVID-19 in AIIMS, Patna and PMCH, Patna hospitals, and (iii) cancel leaves of all employees of the Health Department, and (iv) strengthen screening of travellers entering through the Bihar-Nepal border.
On March 17, the Health Department issued The Bihar Epidemic Diseases, COVID-19 Regulation 2020 under The Epidemic Diseases Act, 1897. The Act provides for better prevention of the spread of dangerous epidemic diseases. These regulations specify the protocol to be followed in both private and government hospitals for screening and treatment of COVID-19 patients. It also empowers the district administration to take containment measures including sealing of specific areas and conducting surveillance for COVID-19 cases. It makes spreading of rumour or unauthenticated information with mala fide intent a punishable offence.
Welfare measures
On March 16, the Chief Minister announced that treatment costs for COVID-19 for residents of Bihar will be sponsored from the Chief Minister Medical Assistance Fund. Moreover, the state government will provide assistance of four lakh rupees to the family of a person dying due to COVID-19.
The government issued directions to provide direct cash transfer in place of the food provided under the Mid-Day Meal scheme in schools, and at Anganwadi centres.
Essential goods and services
On March 21, the Food and Consumer Protection Department directed the district administration to ensure implementation of the Bihar Essential Article (Display of Prices and Stocks) Order, 1977. The Order requires sellers of specified items to display stock and price for the public’s reference. The specified items include food items, edible oilseeds, and petroleum products. The Department also directed the district administration to send proposals for adding any new items to the list of specified items.
During lockdown: strengthening medical response, welfare measures
Upon announcement of the lockdown on March 22, state-level and district-level coordination committees were set up. During the lockdown, the state government’s measures have been aimed towards: (i) strengthening the medical response in the state, (ii) providing relief to various sections of society from issues being faced during the lockdown, and (iii) addressing difficulties with the supply of essential goods and services.
Healthcare measures
On March 25, the Health Department constituted the Bihar COVID-19 Emergency Response Team which is responsible for the control and coordination of all health-related response.
Protocols for containment and treatment: Directions have been issued to implement several guidelines related to containment and treatment measures. These include: (i) set up and operationalization of isolation centres and quarantine centres, (ii) containment plan to address local transmission and community transmission through cluster containment strategy, (iii) surveillance program for Influenza-like Illness (ILI) and Severe Acute Respiratory Illness (SARI), (iv) handling of waste generated during treatment/diagnosis/quarantine, and (v) sanitation of residence and nearby areas of a COVID-19 positive person.
Door-to-door screening campaign: On April 14, the Chief Minister issued directions to start door-to-door screening campaign for suspected cases in affected districts including Siwan, Begusarai, and Nalanda. Such screening campaign will also be run in districts in border-areas, and an area within 3 km radius of the residence of COVID-19 positive patients.
Increasing manpower: The government invited medical professionals including doctors, nurses, and paramedics to volunteer. It also directed the district administration to engage retired doctors, nurses, and paramedics from defence services for volunteer work. Leaves of all employees of the Health Department were cancelled until April 30. The Health Department deputed AYUSH practitioners to assist at isolation and quarantine centres.
Dedicated infrastructure for COVID-19: On April 5, certain government hospitals were designated as exclusive hospitals for treatment of COVID-19 patients. The Health Department also directed certain big private hospitals in Patna to stop OPD services.
Other health-related measures: On March 23, the state government announced payment of one-month basic salary as an incentive to all doctors and health workers. On April 13, the Health Department issued an order prohibiting spitting in public places by tobacco, cigarette, and Pan users. Further, the state government announced that it will procure test kits from the private sector.
Welfare measures
Relief package: On March 23, the state government announced a relief package for people affected due to lockdown. Key features of the relief package are:
ration of one-month to all ration cardholders for free,
one-time cash transfer of Rs 1,000 per family to ration cardholders,
payment of pensions for three months in advance to all pensioners including pension for old age persons, widows, and physically challenged, and
release of pending scholarships to all students.
Help for migrants: On March 26, Rs 100 crore was allocated from the Chief Minister Relief Fund to provide aid to the migrants from Bihar stuck in other parts of the country due to the lockdown. On April 2, the state government announced that a one-time cash transfer of Rs 1,000 will be provided to the migrants. On April 13, an additional Rs 50 crore was allocated from the Relief Fund for this purpose. State-wise nodal officers have been appointed for coordination of relief efforts for migrants. The state government is running 10 food centres in Delhi to help migrants from Bihar.
Relief camps: On March 28, the state government decided to start relief camps along the border (including Nepal border) offering food, shelter, and medical help to persons coming in the state. Community kitchens and relief camps have been started in government school campuses to provide food and shelter.
Electricity tariff: On April 8, the State Cabinet approved the proposals for: (i) reducing electricity tariff for domestic and agricultural consumers by 10 paise per unit and (ii) waiving the monthly meter fee.
Measures for businesses and agricultural activities
The state government provided certain relaxations to businesses in matters related to taxation. These include:
extension in the deadline for payment of GST from March 31 to June 30, no interest or penalty charges to be levied for late payment in certain cases,
three-month extension in the deadline for one-time settlement scheme for pre-GST tax disputes, and
cancellation of orders regarding attachment of bank accounts of certain tax defaulters.
On April 16, the Chief Minister issued directions to start procurement of wheat through the Primary Agriculture Credit Society (PACS).
Essential goods and services
Various departments issued guidelines to the district administration to facilitate operational continuity of essential goods and services including (i) food items, (ii) seeds, fertilisers, and other agriculture-related items, (iii) livestock fodder, and (iv) petroleum products.
On March 27, the Food and Consumer Protection Department brought certain new items under the purview of The Bihar Essential Article (Display of Prices and Stocks) Order, 1977. These include: (i) wheat and wheat products, (ii) masks and hand sanitisers, and (iii) potato and onion.
Other Measures
Education: On April 8, the cabinet approved the proposal to promote students of Class I to XI (except class X) without annual examination.
Legislature: Salaries of MLAs and MLCs have been reduced by 15% for one year. The amount will be donated to the state’s Corona relief fund.
Labour and employment: On April 16, the Chief Minister issued directions to resume public works under the Saat Nischay Programme, Jal Jeevan Hariyali Yojana, and MNREGA.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.
