Sakshi of PRS Legislative Research discusses the government's ordinance-making power in the context of the National Food Security Ordinance in an Indian Express opinion editorial. On Wednesday, the Union cabinet approved the food security ordinance. The government has already introduced a National Food Security Bill in Parliament in December 2011. Parliamentary consideration on the bill has been initiated with the standing committee submitting its recommendations and the government proposing amendments to the law. After being listed on several occasions for discussion, members of Parliament began debating the bill in the last few days of the 2013 budget session. In spite of all this, the government has chosen to promulgate an ordinance. In all likelihood, Parliament will reconvene in a few weeks for the monsoon session. In this context, it would be useful to understand the ordinance-making power of government and its usage in the recent past. Under the Constitution, the power to make laws rests with the legislature. The executive has been given the power to make laws when Parliament is not in session and "immediate action" is necessary. In such scenarios, the president can issue an ordinance on the advice of the executive, to have the same effect as an act of Parliament. In the 1980s, the Supreme Court was confronted with a case where a state government repeatedly re-promulgated ordinances that had lapsed in previous assembly sessions. This led the SC to examine the ordinance-making power of government. The SC reasserted the constitutional principle that the primary law-making power rests with the legislature and not the executive. The executive is only given the legislative power to issue an ordinance to meet an "emergent situation". Such a situation arose in 2011 when, given that students were awaiting their degrees on the completion of their course, the government issued an ordinance to grant IIIT-Kancheepuram the status of an institute of national importance so that students could be awarded their degrees. Data over the last 60 years indicates that the highest number of ordinances, 34, were passed in 1993. Over the 15th Lok Sabha (2009-2013), there have been 16 ordinances, indicating a decline in the number of ordinances being issued every year. Once an ordinance is framed, it is to be laid before Parliament within six weeks of its first sitting. Parliament is empowered to either choose to pass the ordinance as law or let it lapse. Once the ordinance is laid in Parliament, the government introduces a bill addressing the same issue. This is typically accompanied by a memorandum tabled by the government, explaining the emergent circumstances that required the issue of an ordinance. Thereafter, the bill follows the regular law-making process. If Parliament does not approve the ordinance, it ceases to exist. The drafters of the Constitution created this check on the law-making power of the executive to reinforce the notion that law-making will remain the prerogative of the legislature. Earlier this year, in the aftermath of the Delhi gangrape, public pressure led the government to appoint a three-member committee under the late Justice J.S. Verma to suggest changes to laws relating to crimes against women. An amendment bill had already been pending in Parliament. In spite of this, the government brought in the Criminal Law Ordinance, giving effect to some of the committee's recommendations. Once Parliament reconvened, the government introduced a fresh bill replacing the ordinance, seeking to create more stringent provisions on matters related to sexual offences. It passed muster in both Houses. While the Criminal Law Ordinance is an illustration of an ordinance successfully passing through Parliament, there are examples of ordinances that have lapsed because they were not approved by Parliament. In 2004, a week after the winter session ended, the government issued an ordinance to give the Pension Fund Regulatory and Development Authority statutory powers as a regulator. Due to political opposition, the ordinance lapsed and, subsequently, the bill lapsed at the end of the 14th Lok Sabha. The government re-introduced it as a bill in 2011, which is currently pending in Parliament. Although the government has used its power to issue a food security ordinance, the law guaranteeing this right will have to stand scrutiny in Parliament. What remains to be seen is how Parliament debates the right to food in the upcoming monsoon session. That should give us some food for thought. For an analysis of the National Food Security Bill, refer to Sakshi's blog post here.
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.
