Tag Archives: insolvency and bankruptcy code

Notification of Insolvency and Bankruptcy (Amendment) Act, 2018

The Insolvency Bankruptcy Code (Second Amendment) Bill, 2018 was introduced in the Parliament on July 23, 2018 to amend the Insolvency and Bankruptcy Code, 2016 and replace the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 that was released on June 6, 2018. The Bill was passed by the Lok Sabha on July 31, 2018 and by the Rajya Sabha subsequently on August 10, 2018, thereby making it a passed legislation (the Act). The various amendments to the existing legislative framework have been listed down below:

  1. Financial Creditors: The Act deems allottees under a real estate project to be financial creditors. Allottees under a real estate project would include a person to whom a plot, apartment, or building has been allotted, sold or transferred by a real estate developer or a development authority.
  2. Representative of Financial Creditors: As per the Act, a representative authority can be appointed to represent a class of financial creditors on the committee of creditors. Under the ordinance, the remuneration was to be borne collectively by the financial creditors but under the Act, this remuneration would be a part of the insolvency resolution costs.
  3. Voting Threshold: Under the Insolvency and Bankruptcy Code, 2016, the voting threshold for all decisions of the committee of creditors was by a majority of 75%. This threshold has been brought down to 51%. A voting threshold of 66% has been prescribed for decisions pertaining to appointment or replacement of resolution professional and approval of resolution plan.
  4. Disqualification of resolution applicant: Under the Insolvency and Bankruptcy Code, 2016, a person convicted of an offence which is punishable with two or more years of imprisonment was disqualified to be eligible to be a resolution applicant. The Act provides that such disqualification would cease to exist after two years of date of completion of punishment.
  5. Disqualification of NPAs and guarantors: The Insolvency and Bankruptcy Code, 2016 barred a person identified as an NPA for than a year and a guarantor of a defaulter from being a resolution applicant. This bar has been removed in regard to applicants applying for resolution of MSMEs.
  6. Withdrawal: The amendment provides for withdrawal of resolution application after initiation of resolution process provided the same has been approved by 90% vote of the committee of creditors.
  7. Implementation: The Act provides that the resolution plans should contain an implementation mechanism without which approval would not be given. Moreover, the Act also requires that if the resolution plan provides for a merger or acquisition of enterprises, the consent of the Competition Commission of India is required before approval of resolution plan by the committee of creditors.
  8. Appointment of Interim Resolution Professional: The Act also provides that in case of a delay in the appointment of Interim Resolution Professional, the Insolvency Commencement Date would be considered as the date on which the Interim Resolution Professional was appointed.

“Dispute” is heavily disputed under Insolvency and Bankruptcy Code

 Interpretation of ‘Dispute’ in case of application by Operation Creditor

Introduction

Under the Insolvency and Bankruptcy Code, 2016 (“Code”), an operational creditor can initiate a corporate insolvency resolution process (“CIRP”) by filing an application before the jurisdictional National Company Law Tribunal (“NCLT”) upon occurrence of a default in payment of its operational debt under section 8 and 9 of the Code.

Before making an application, the operational creditor shall issue a demand notice or issue a copy of invoice to corporate debtor. Such corporate debtor, within a period of 10 days from the date of receipt of notice, shall either repay the outstanding debt or bring to the notice of operational creditor regarding the existence of any Dispute before any authority.

The term ‘Dispute’ is defined under sub-section 6 of section 5 of the Code. Dispute includes a suit or arbitration proceedings relating to (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty;

In case if the operational creditor doesn’t receive either the outstanding payment or notice of existence of dispute, then he can make an application to NCLT to initiate the CIRP.

The ambit of the definition of Dispute is discussed in case of 24thMay17_in_the_matter_of_Kirusa_Software_Private_Ltd_vs_Mobilox_Innovations_Private_Ltd (Company Appeal (AT) (Insolvency) 6 of 2017 dated 24 May 2017 and decided the definition of Dispute under section 5 of the Code.

Facts of the Case

The Appellant had issued a demand notice on Respondent as an operational creditor, demanding payment of certain dues. Respondent issued a reply to the demand notice (“Mobilox Reply”) inter alia stating that there exists serious and bona fide dispute between the parties and Appellant had breached the terms of an NDA between the parties.

Later, the Appellant had filed application with NCLT, Mumbai Bench for CIRP. However, the NCLT rejected application on the grounds that the Respondent has issued a notice to Appellant on the existence of the Dispute. The Respondent in his notice had quoted that the claim of the Appellant is not due and payable as there exist serious and bonafide dispute in case of breach of the terms and conditions of the Non-Disclosure Agreement (the NDA) and divulged the client’s confidential information and the debt has been disputed by the Respondent. Basis this, the NCLT, Mumbai Bench rejected the Application vide its order dated 27 January 2017.

The Appellant challenging the order of NCLT, filed petition with National Company Law Appellate Tribunal (NCLAT) claiming that mere disputing a claim of default of debt cannot be a ground for rejection under section 9 of the Code. The NCLAT observed the definition of Dispute under the Code and it was noted that the definition of dispute is “inclusive” and not “exhaustive”. The same has to be given wide meaning provided it is relatable to the existence of debt, quality of goods or service, breach of representation and warranty. Such dispute cannot be confined to suit or proceedings only.

The question that has arisen before NCLAT is whether a corporate debtor can raise all kinds of disputes or can the notice of dispute only refer to pendency of a suit or arbitration before receipt of the demand notice. The NCLAT also observed the same in case of Mithlesh Singh v/s Union of India (2003) 3 SCC 309 that the intent of legislature is not to limit the dispute to only a pending suit or arbitration proceedings and record of pendency becomes irrelevant if the corporate debtor proves the existence of dispute and there is no default, before the receipt of demand notice under section 8(1) of the Code. The statutory requirement under section 8(2) of the Code is that the corporate debtor must raise dispute with sufficient particulars and such dispute shall be relatable to the existence of debt, quality of goods or service, breach of representation and warranty. It was also noted that mere raising a dispute for the sake of showing existence of dispute, shall not be entertained.

Judgement

Referring to the notice in Form D received from corporate debtor it was held that the Respondent’s notice does not raise any dispute within the meaning of Section 5 (6) or Section 8 (2) of the Code, that Respondent has disputed the payment merely on “some or other account” and that its defence was “vague, got up and motivated to evade the liability”. The NCLAT has set aside the order of NCLT, Mumbai and remitted the case to it for consideration.

Ashwin Bhat, is a Senior Associate with NovoJuris Legal

 

Regulatory Updates: Companies Act, Bankruptcy and Insolvency Code, SEBI, Ministry of Corporate Affairs

  1. Clarification on “Relevant Date”: Scheme of Arrangement during Preferential Allotment for Listing Entities
  2. The Companies (Audit and Auditors) Amendment Rules, 2017
  3. The Companies (Meetings of Board and its Powers) Amendment Rules, 2017
  4. Amendment in Schedule III to the Companies Act 2013
  5. The Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017

Securities and Exchange Board of India (SEBI)

Clarification on “Relevant Date”: Scheme of Arrangement During Preferential Allotment for Listing Entities

SEBI has issued a notification clarifying on “Relevant Date” in case of any preferential issue of equity share of listed entities.

Earlier, the relevant date for the purpose of computing price per security for preferential issue was thirty days, prior to the date on which the meeting of shareholders is held to consider the preferential issue. With this notification, the “relevant date” shall be the date of Board meeting in which the scheme is approved.

Source

Ministry of Corporate Affairs (MCA)

The Companies (Meetings of Board and it’s Powers) Amendment Rules, 2017

The Ministry of Corporate Affairs (MCA) vide its notification dated 30 March 2017 has notified the Companies (Meetings of Board and its Powers) Amendment Rules, 2017, applicable w.e.f 30 March 2017 and modified the Rule 15 (3) with respect to the provisions relating to Related Party Transactions under Sub Rule 3 of Rule 15 in pursuant to Sub section 1 of Section 188 of the Companies Act, 2013.

With this notification, a Company shall not enter into transactions without the previous approval of shareholders, where the transaction(s) to be entered into involves the following:

  • Sale, purchase or supply of any goods or materials, whether directly or through any agents- amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower.
  • Selling or otherwise disposing of or buying property of any kind, directly or through any agent- amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower.
  • Leasing of property of any kind – ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower.
  • Availing and rendering of any kind of services, directly or through appointment of agent – amounting to ten per cent. or more of the turnover of the company or rupees fifty crore, whichever is lower

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Amendment in Schedule III to The Companies Act, 2013

The Ministry of Corporate Affairs (MCA) vide its notification dated 30 March 2017 has amended Schedule III of the Companies Act 2013 applicable w.e.f 30 March 2017, to include formats to disclose holding/ dealings of specified bank notes of Rs. 500/ Rs. 1000 by the Companies during the period of demonetization in India.

The Schedule III to the Companies Act, 2013 provides general instructions for preparation of the balance sheet and the statement of profit and loss of a company.

Applicability

  • It is applicable to every company to which Ind AS apply in preparation of its financial statements.
  • The provisions of Schedule III also apply when a company is required to prepare consolidated financial statements, in addition to the disclosure requirements specified under Ind AS.

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The Companies (Audit and Auditors) Amendment Rules, 2017

The Ministry of Corporate Affairs (MCA) has notified the Companies (Audit and Auditors) Amendment Rules, 2017, applicable w.e.f 30 March 2017, amending the requirements for reporting by the Company about the requisite disclosures of holding/ dealings of specified bank notes of Rs. 500/ Rs. 1000 during the period from 8 November 2016 to 30 December 2016, (the period of demonetization in India ) for assessing whether it is in accordance with the books of accounts maintained by the Company.

Source

Insolvency and Bankruptcy Board of India

The Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017

The Insolvency and Bankruptcy Board of India (IBBI) vide its notification dated 31 March 2017 has notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 applicable w.e.f 1st April, 2017. The gist of this regulation is as below:

  1. The regulation provides for complete procedure for voluntary liquidation of corporate persons (i.e. companies, limited liability partnership and any other person incorporated with limited liability till its dissolution) which has not committed any default.
  2. A corporate person may initiate a voluntary liquidation proceeding, if majority of the directors or designated partners of the corporate person shall make following declaration to the effect that:
      • There is no debt on corporate person
      • In case of debt, it has to be paid in full from the proceeds of the assets sold under proposed liquidation.
      • The corporate person is not being liquidated to defraud any person

    In case of non-fulfilment of the above conditions the liquidator has to write an application to the Adjudicating Authority and, hence, process of liquidation will be suspended

  3. The winding up process shall commence on the date on which a special resolution is passed by the members/partners of the corporate person to liquidate the corporate person and appoint an insolvency professional to act as the liquidator. On the appointment of a liquidator, the corporate person shall cease to carry on its business.
  4. A liquidator needs to be independent and impartial, therefore, an insolvency professional of a corporate person is prohibited from acting as a liquidator.
  5. Insolvency professional is also required to disclose any pecuniary or personal relationship with any of the stakeholders or the corporate person.
  6. The regulations specify the manner and content of public announcement, receipt and verification of claims of stakeholders, reports and registers to be maintained, preserved and submitted by the liquidator, realisation of assets and distribution of proceeds to stakeholders, distribution of residual assets, and finally dissolution of corporate person.
  7. The regulation requires a liquidator to preserve a physical or an electronic copy of the reports, registers and books of account for at least 8 years after the dissolution of the corporate person, either with himself or with an information utility. On the completion of the liquidation process, the liquidator shall prepare and submit the final report to the NCLT and after the affairs of the corporate person are wound up, he will make an application to NCLT for dissolution of the corporate person.
  8. It also provides for the manner and procedure for dealing with extortionate credit transactions, unclaimed proceeds of liquidation/undistributed assets, detection of fraud, etc.

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