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Introduction: This article discusses in detail highlights of the Ordinance to amend to the Insolvency & Bankruptcy Code, 2016 regarding willful defaulters and entities whose accounts have been classified as NPAs to be barred from bidding for assets under the insolvency law. 
As all of us aware, the Hon'ble President of India has given his assent to an ordinance to amend the Insolvency & Bankruptcy Code, 2016 preventing unscrupulous persons from misusing or vitiating the provisions of the said Code. The Ordinance amends sections 2, 5, 25, 30, 35 and 240 of the Code, and inserts new sections 29A and 235A in the said Code.
These amendments aim to keep-out such persons:

  1. who have willfully defaulted, or
  2. are associated with non-performing assets, or
  3. are habitually non-compliant

and, therefore, are likely to be a risk to successful resolution of insolvency of a company.

In addition to putting in place restrictions for such persons to participate in the resolution or liquidation process, the Amendment also provides such check by specifying that the Committee of Creditors ensure the viability and feasibility of the resolution plan before approving it.

The Insolvency and Bankruptcy Board of India (IBBI) has also been given additional powers.
Highlights of the amendments are given below: 

Section 2 (e) regarding applicability for the provisions of the Code has been extended to

  • Personal guarantors to corporate debtors
  • Partnership firms and proprietorship firms and
  • Individuals, other than persons referred to in clause (e), i.e., personal guarantors 

This would facilitate the commencement of Part III of the Code relating to individuals and partnership firms in phases.

i. Section 5 (25) and 5 (26) of the Code which define 'Resolution Plan' and 'Resolution Applicant' are amended to provide clarity that resolution plan submitted pursuant to invitation made under Section 25 (2) (h) of the Code.

ii. Section 25(2)(h) of the Code is amended to enable the Resolution Professional, with the approval of the Committee of Creditors (CoC), to specify eligibility conditions while inviting Resolution Plans from prospective Resolution Applicants

iii. Section 29A is a new Section that makes certain persons as below ineligible to be a Resolution Applicant for submitting Resolution Plan:

a. Willful Defaulters are ineligible to submit Resolution Plan.

b. Those who have their accounts classified as Non-Performing Assets (NPAs) for one year or more and are unable to settle their overdue amounts with interest thereon and charges relating to the account before submission of the Resolution Plan.

c. Those who have executed an enforceable guarantee in favour of a creditor, in respect of a Corporate Debtor undergoing a Corporate Insolvency Resolution Process or Liquidation Process under the Code.

d. And connected persons to the above, such as those who are Promoters or in management of control of the Resolution Applicant, or will be Promoters or in management of control of Corporate Debtor during the implementation of the Resolution Plan, the holding company, subsidiary company, associate company or related party of the above referred persons.

iv. It has also been specifically provided that COC shall reject a Resolution Plan, which is submitted before the commencement of the Ordinance but is yet to be approved, and where the Resolution Applicant is not eligible as per the Section 29A.

v. Section 30(4) is amended to explicitly obligate the COC to consider feasibility and viability of the Resolution Plan.

vi. The Sale of Property to a person who is ineligible to be a Resolution Applicant under Section 29A has been barred through the amendment in Section 35(1)(f).

vii. In order to ensure that the provisions of the Code and the Rules and Regulations prescribed thereunder are enforced effectively, the new Section 235A provides for punishment for contravention of the provisions where no specific penalty or punishment is provided. The punishment is fine which shall not be less than one lakh rupees but which may extend to two crore rupees.

viii. Consequential amendments in Section 240 of the Code, which provides for power to make Regulations by IBBI, have been made for regulating making powers under Section 25(2)(h) and 30(4). 

The main aim of this Ordinance is to strengthen the formal economy and encourage honest businesses and budding entrepreneurs to work in a regulatory environment.

The author is a practicing CA based in Delhi and is registered Insolvency Professional. He can also be reached at cavinodchaurasia@gmail.com


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