The nascent Insolvency and Bankruptcy Code (IBC) is far from perfect as has been noted may times by various courts and tribunals. The Insolvency Law Committee was formed to make recommendations on issues arising from the implementation of IBC. The committee proposed to insert an explanation to the definition of ‘financial creditors’, to clarify that homebuyers are covered as financial creditors. The committee was of the view that homebuyers are financial creditors, but such explanation will obviate the confusion and multiple interpretations being taken on this issue. The aggrieved homebuyers will have a remedy under IBC, in addition to one under the Consumer Protection Act.
There was a suggestion before the committee to amend the definition of ‘operational debt’ to include dues payable to regulatory bodies. But it did not consider this on the ground that the intention of IBC is to prioritise debts owed to unsecured creditors and regulatory bodies have the power to recover dues under relevant statutes.
The committee has taken into consideration the decision of the Supreme Court in the Mobilox Innovations case and recommended that the definition of ‘existence of dispute’ be amended, to include not only pendency of a suit or arbitration, but any disputes between the parties other than pending suit or arbitration. Similarly, in light of the decision of the Supreme Court in the Macquarie Bank case, the committee proposed that filing of certificate be made optional. This would help those operational creditors who have bank accounts in foreign or non-scheduled banks as the definition of ‘financial institution’ does not include foreign or non-scheduled banks.
The committee dealt with applicability of moratorium under Section 14 to the assets of the guarantor. There have been disputes as to whether the personal assets of guarantors are covered within the moratorium. The committee recommended that the language of Section 14 is clear and that moratorium extends only to assets of the corporate debtor—that personal assets of guarantors should be kept out of the purview of moratorium.
The committee considered the issue of high threshold of voting required for approval of resolution plan and opined that existing requirement of 75% is a hindrance. It suggests scaling it down to 66% or more, and for continuing the corporate debtor as a going concern to 51% or more. If implemented, this will lead to approval of resolution plans faster.
The committee considered the issue of disqualification of persons acting as resolution applicants and suggested amendments to Section 29A. One such is to clarify that only defaulters and connected persons would be covered by the provision. This would enlarge the pool of prospective resolution applicants. To prevent misuse of the widened provision, it suggested the definition of ‘connected persons’ be amended to include persons acting with a common objective with defaulters, to acquire voting rights, share and control of the corporate debtor. It recommended that such amendments to Section 29A be given force prospectively to safeguard resolution proceedings pending at an advanced stage.
The committee has recommended raising the threshold for filing of resolution application from Rs 1 lakh to Rs 10 lakh for all creditors—it is to keep frivolous applications at bay. The committee also recommended that Section 10 application should only be allowed if accompanied by a special resolution passed by shareholders or the approval of three-fourths of total partners of the corporate debtor to prevent misuse of the provision.
The committee resolved there is a need for comprehensive cross-border insolvency framework as the existing provisions do not provide for the same. It decided to separately submit its recommendation on cross-border insolvency based on the UNCITRAL Model Law.
The report has addressed most of the areas that have been debated in recent times and its recommendations, if implemented, would be a step forward in fine-tuning IBC.
By Monish Panda, Founder, Monish Panda & Associates