Cabinet Approves Changes In Insolvency And Bankruptcy Code; Buyers To Be Protected From Criminal Proceedings

The Union Cabinet has approved changes in the Insolvency and Bankruptcy Code (IBC), including protection of buyers from criminal proceedings against previous promoters of the bankrupt firm.

The amendments would also pave the way for initiation of insolvency proceedings against a real estate entity only if a class of creditors approves it. Also, the changes would protect the 'going concern status' of a company facing insolvency while providing protection of last-mile funding in financially distressed sectors.

With regard to protection of buyers in a resolution plan, a government statement said that the amendment would ring-fence the corporate debtor resolved under the IBC in favor of a successful resolution applicant from criminal proceedings against offences committed by previous management or promoters.

The decision will have a major impact on cases such as the Bhushan Power & Steel Ltd (BPSL) insolvency process whereby JSW Steel emerged the successful bidder, but its transaction was halted by the National Company Law Appellate Tribunal (NCLAT) after the Enforcement Directorate (ED) attached properties of the bankrupt BPSL.

The NCLAT had in October put JSW Steel's Rs 19,700 crore payment to acquire BPSL on hold and asked the ED to release BPSL's attached properties worth about Rs 4,000 crore. Last week, the NCLAT directed the ED to file an affidavit on developments related to attachment of BPSL assets.

“The Union Cabinet chaired by the Prime Minister Narendra Modi today approved the proposal to make amendments in the Insolvency and Bankruptcy Code, 2016 (code), through the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019. The amendments aim to remove certain difficulties being faced during insolvency resolution process to realize the objects of the code,” an official statement said.

The amendment introduced also brought additional thresholds introduced for financial creditors represented by an authorized representative due to large numbers in order to prevent frivolous triggering of Corporate Insolvency Resolution Process (CIRP), which would majorly be effective in terms of insolvency proceedings against a real estate company filed by home buyers.

As an effect a threshold would be set for home buyers to start insolvency proceedings through the next amendment, in a bid to limit abuse of the IBC.