The intent of the Legislature in repealing the erstwhile SICA Act and its substitution with the new Insolvency & Bankruptcy Code (IBC) 2016was to ensure more effective, sensitive, holistic and timely financial revival of the stressed companies as well as protecting the interests of all stakeholders and financial and operational creditors.
However, three years down the line, faced with several practical and procedural bottlenecks, the IBC 2016 is still improving and evolving and the recent amendments in IBC Amendment Bill 2019, as approved by the Union Cabinet are in this direction only and are aimed at bridging the gaps between theoretical idolism and practical implementation.
The proposed amendments in IBC Amendment Bill 2019 are discussed as under:
(i) Deadline of 330 days including litigation period for Completion of Resolution Plans:
The existing IBC 2016 provides for a time period of 270 days for completion of resolution plans but this time period excludes the time spent in litigations, and judicial process and as such in practical terms this deadline of 270 days was turning out to be redundant and meaningless in view of the prolonged litigation period. So, with a view to make the stipulated deadline for completion of resolution plans effective and meaningful, the proposed amendment provides for the deadline of 360 days inclusive of the litigation period, for completion of the resolution plan.
(ii) Enhancement in Powers of Committee of Creditors (CoC):
The proposed amendment in IBC Amendment Bill 2019provides the much-needed flexibility to the CoC to decide on the distribution of claims on the basis of commercial consideration within the broad framework of mandatory order of priority as stipulated in section 53 of IBC 2016.
(iii) Supremacy of Financial Creditors over Operational Creditors:
In a recent resolution plan in Essar Steel Case, NCALT had treated financial creditors (banks and other secured creditors) to be at par with operational creditors (vendors) in distribution of their respective claims and the said resolution plan has been challenged by the concerned financial creditors in the Supreme Court.
The proposed amendment in IBC Amendment Bill 2019, reiterates and reinforces the supremacy of financial creditors over operational creditors, and a simultaneous guarantee of a minimum liquidation value to the operational creditors.
(iv) Majoritarian Criteria of 50% or more for Voting among a particular class of creditors:
The proposed amendment in IBC Amendment Bill 2019 provides that a majority vote of 50% or more from a particular class of creditors will be counted as 100% vote in favour of or against a resolution plan by that particular class of creditors in place of the existing criteria of minimum 66% votes.
(v) Binding Nature of Resolution Plans under IBC:
In line with the recent judgement of the Hon’ble Supreme Court in the case of PCIT vs. Monnet Ispat and Energy Ltdupholding the overriding nature and supremacy of the provisions of the IBC Code 2016 over any other enactment in case of conflicting provisions, by virtue of a non obstante section 238 of IBC Code 2016, the proposed amendment in IBC Amendment Bill 2019, provides that the bankruptcy resolution or liquidation arrived at under IBC shall be binding on central, state and local governments including the income tax and other similar tax authorities.
(vi) Recognition of Mergers, Demergers and Amalgamations as alternative parts of Resolution Plans under IBC:
The proposed amendment in IBC Amendment Bill 2019, provides for the inclusion of alternative restricting schemes such as mergers, demergers and amalgamations as part of the resolution plan. At present, the IBC stipulates either rehabilitation/revival of the stressed company as a going concern or its liquidation and does not provide for any other alternative restructuring schemes such as mergers, demergers and amalgamations as part of resolution plan.
All the above-proposed amendments are really very positive and welcome initiatives aimed at ensuring more flexibility, viability, effectiveness and faster implementation of resolution plans under IBC and in reducing the unnecessary litigations and to bring in the much-needed stability and certainty in the IBC resolution process.
However, in addition to above, some very crucial and essential reforms and rationalization measures are also required to be further incorporated in the IBC Act to incentivize and boost the potential buyers/bidders to encourage them to come out with effective resolution plans under IBC. These much needed and desirable reforms in the IBC are discussed as under:
(i) Suitable Amendments in IBC Amendment Bill 2019 to ensure Non-Applicability of the MAT provisions u/s 115JBand taxability under sections 28(iv) & 41(1) of the Income Tax Act on the waiver of loans/liabilities of the stressed/insolvent companies under IBC:
The waiver of loans and liabilities of the stressed/insolvent companies by the financial and operational creditors form an integral and crucial part of all the resolution plans aimed at the financial revival of insolvent companies under IBC.
The erstwhile SICA expressly contained a provision stipulating the non-applicability of MAT u/s 115JB of the Income Tax Act to the stressed companies under IBC. However, at present there is no such provision in the existing IBC Act.
So with a view to make the resolution plans practically viable and to do away with the possibility of perishing of the resolution proceeds as unwarranted income tax outflows on account of consideration of waiver of loans and liabilities of stressed companies as notional book profits u/s 115JB of the Income Tax Act, it is indeed the need of the hour to incorporate suitable amendments in the IBC Amendment Bill 2019 to ensure non-inclusion of such waiver of loans and liabilities in book profits of stressed/insolvent companies under IBC, for the purpose of MAT determination under MAT provision u/s 115JB of Income Tax Act.
Further, recently the Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd.  93 taxmann.com 32 (SC), has laid down the law that waiver of loan shall not be taxable either u/s 28(iv) or s.41(1).
The Apex court has now clarified that ‘waiver of loan’ should be treated as ‘receipt of money’ and hence such receipt of money would fall outside the purview of s.28(iv) and accordingly cannot be taxable.
The Apex Court has also held that ‘waiver of loan’ does not amount to cessation of trading liability and as such the same would not fall within the purview of s.41(1).
Therefore, in view of the binding nature of the above judgement of the Hon’ble Supreme Court and more importantly in order to provide the much needed boost and push to resolution plans under IBC aimed at ensuring financial revival of stressed/insolvent companies, suitable amendments are desirable in the IBC Amendment Bill 2019, so as to ensure the non-applicability of sections 28(iv) and 41(1) of the Income Tax Act on the waiver of loans and liabilities both on capital and revenue accounts, of stressed/insolvent companies in resolution plans under IBC .
(ii) Suitable Amendments in IBC Amendment Bill 2019 to ensure Non-Applicability of the provisions of section 56(2)(x) & 50CA of the Income Tax Act to the stressed/insolvent companies whose resolution plans for their revival have been approved by NCLT under IBC Act :
At present, the potential buyers/bidders desirous of reviving/acquiring stressed/insolvent companies under IBC, face the pressures and litigations from income-tax authorities challenging the valuation aspects of the acquisitions under section 50CA and 56(2)(x) of the Income Tax Act.
Under Sections 50CA and 56(2)(x) of the Income Tax Act, the differential value between the fair market value and the bidding consideration is taxable if the bidding consideration is lower than the fair market value. Section 50CA imposes a tax on this notional capital gain income on the seller and section 56(2)(x) imposes a tax on the buyer by treating the difference as income from other sources.
The FMV of the bidding consideration has to be calculated as per the Rule 11UA of the Income Tax Rules, 1962 withintrinsic book values or listed stock market prices to be taken into account. There may be situations, where the bid price of the securities forming part of the resolution plan is lower than the FMV determined under Rule 11UA. Since these transactions of bidding are being undertaken in the open market through a competitive bidding process, it would be grossly unfair to tax the sellers and buyers on this notional income.
Thus, in order to ensure the successful and meaningful implementation of resolution plans under IBC, suitable amendments are desirable in the IBC Amendment Bill 2019, so as to ensure the non-applicability of sections 56(2)(x) & 50CA on such stressed/insolvent companies whose resolution plans for their financial revival have been approved by NCLT under IBC.
(iii) Suitable Amendments in IBC Amendment Bill 2019 to ensure Non-Applicability of the provisions of sections 2(1B), 2(19AA) & 72A of the Income Tax Act concerning allowability of carry forward and setoff of losses and unabsorbed depreciation in case of stressed/insolvent companies under IBC Act 2016:
In making strategic acquisitions of insolvent companies under IBC, the consideration of income tax benefit of availment of set-off benefit towards brought-forward business losses and unabsorbed depreciation of insolvent companies plays a very significant role in luring the potential bidders/buyers and it is a universal phenomenon in almost all strategic and financial revival plans under IBC.
The conditions for availing the benefit of set-off towards brought-forward business losses and unabsorbed depreciation of the amalgamating/demerging entity are stipulated in section 72A of the Act within the meaning of section 2(1B) or 2(19AA) of the Act.
The primary conditions as envisaged in section 72A are that atleast 75% of the shareholders of the amalgamating/demerging entity must be given shareholding in the amalgamated/demerged entity, amalgamated/demerged company must hold at least 75% of the book value of fixed assets of the amalgamating/demerging entity for a minimum period of five years from the date of amalgamation/demerger; and that the new entity must continue the business of the stressed company for a minimum period of five years from the date of amalgamation/demerger. If either of the conditions is not met, the tax benefit of loss and depreciation is to be taxed in the year the condition is breached.
All these conditions, may in a certain type of resolution plans, be difficult to comply with. Plans which require significant divestment of fixed assets for reasons of business viability may be hit by this embargo. The limitation on the continuation of the old business after amalgamation hampers the flexibility of the acquirer to bring about a turnaround by restructuring the old business into a new business which is viable. In such situations, acquirers/bidders would be hampered by not being able to take the amalgamation route.
In view of above, suitable amendments in IBC Amendment Bill 2019 are desirable in order to ensure Non-Applicability of the provisions of sections 2(1B), 2(19AA) & 72A of the Income Tax Act concerning allowability of carry forward and setoff of losses and unabsorbed depreciation in case of stressed/insolvent companies under IBC,so as to encourage more potential buyers and bidders to participate in the resolution plans for ensuring the financial revival of such stressed/insolvent companies.
The government has identified the success of IBC as a key determinant of our country’s economic growth,and as such it is imperative for the concerned finance ministry and revenue authorities to have a more compassionate, pragmatic and rational view concerning the above mentioned desirable reforms and rationalisation measures in the IBC Amendment Bill 2019 so as to ensure more flexibility, viability, effectiveness and faster implementation of resolution plans under IBC and to reduce the unnecessary litigations and to bring in the much needed stability and certainty in the IBC resolution process.
“Even perfection has room for improvement.”
- Ty Warner