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IBC Ordinance, 2019 – Relief for Prospective Investors

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 came to an effect on December 28, 2019. It seeks to remove certain ambiguities in the IBC 2016. It fill critical gaps and address certain issues such as disposal of resolution application in a time-bound manner, to promote entrepreneurship. One of the important amendment in the Ordinance is the insertion of a new section 32A which restricts the liability of the corporate debtor for offences committed prior to the commencement of the insolvency process. It also aims to protect the bidders which are participating in the recovery proceedings and in turn boosting investor confidence in the country's financial system.

The amendment mandates the threshold limit for initiating the resolution process

A financial creditor (either by itself or jointly with other financial creditors) may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process. The Ordinance amends this to provide minimum thresholds for financial creditors of same class under clause (a) or (b) under sub-section (6A) of Section 7 for initiating the insolvency resolution process.

The threshold limit for filing an application under code is a joint application by minimum of 100 creditors or 10% of such creditors in the same class, whichever is less.

In case of real estate projects, if an allottee wants to initiate the resolution process, the application should be filed jointly by at least 100 allottees under the same real estate project, or 10% of the total allottees under that project, whichever is less.

With enforcement of this amendment, an individual allottee/ debenture or bond holder/ public depositor would not be able to bring a corporate debtor under the ambit of code which otherwise had occurred in some of the real estate developers.

Applications which are pending before the adjudicating authority for initiating the resolution process and which have not been admitted, will fall under the ambit of such mandatory threshold limit. However, a time period of 30 days has been granted to all such pending applications to comply with the said threshold limit. Failure of such a requirement within the stipulated period then all such applications would be deemed to be withdrawn.

Explanation II has been inserted in Section 11 of the IBC to clarify that a corporate debtor can initiate insolvency process against another corporate debtor

The IBC restricts certain corporate debtors from making an application to initiate the insolvency resolution process which are as follows:
  1. corporate debtors undergoing an insolvency resolution process,
  2. corporate debtors who have completed the resolution process 12 months before making the application,
  3. corporate debtors or financial creditors who have violated terms of the resolution plan, or
  4. corporate debtors in respect of whom a liquidation order has been passed.

The Ordinance clarifies that such corporate debtors will be allowed to initiate the resolution process against other corporate debtors.

Explanation has been inserted in Section 14 of the IBC where existing Licenses, permits and registrations not to be terminated on the ground of insolvency

The Ordinance extend the moratorium under IBC to protect license, permit, registration, quota, concession, or clearance or a similar rights given by the government or local authority, will not be suspended or terminated on the grounds of insolvency unless there is default in payment of current dues for the use or continuation of such grants.

Newly inserted sub-section (2A) empowers the IRP or RP to maintain the supply of goods and services if they considers it to be important for the corporate debtor and prevent termination of arrangements relating to such supply so as to protect and maximise the value of the corporate debtor. It allows corporate debtor to exist as a going concern. This provision will not apply if the debtor has unpaid dues to the suppliers or in certain other specified circumstances.

Recently, Supreme Court had to deal with the said issue in Embassy Property Development Pvt. Ltd. v. State of Karnataka, Civil Appeal No. 9170 0f 2019, decided on 3rd December,2019.

Also, in Municipal Corporation of Greater Mumbai v. Abhilash Lal & Ors., Civil Appeal No. 6350 of 2019, decided on 15th November, 2019, the Court concluded with the well¬ known principle that there can be no estoppel against the express provisions of law.

Liability for prior offences:

A new Section 32A has been inserted by the ordinance which grants immunity to the new management and corporate debtor. Under the amendments, the liability of a corporate debtor for an offence committed before the corporate insolvency resolution process will cease.

Subsection (1) of Section 32A provides that corporate debtor shall not be prosecuted for any offence made prior to initiation of corporate insolvency process, if the resolution plan results in change in management. It also provides that no initiation of prosecution after the insolvency resolution plan has been approved by the adjudicating authority leading to change in management. The term “offence” and “prosecution” has been used in the clause. Thus, the clause refers to criminal liability only. Therefore civil proceedings resulting in penalty etc. can be initiated for civil wrongs done by the corporate debtor before initiation of corporate insolvency process; against the corporate debtor even after new management has taken control.

Sub-section (2) protects the property of corporate debtor in relation to offences committed prior to commencement of insolvency process. Again, the sub-section refers to “offences”. Thus, corporate debtor’s property is not protected against civil liabilities, arisen prior to the commencement of insolvency process. Hence to conclude corporate debtor under new management is liable to numerous civil liabilities which are incurred prior to commencement of insolvency process.

The ordinance provides that the immunity against prior offences will be available only to persons who were not promoters or in the management or control of the corporate debtor. The person seeking immunity should not be a related party of any person who was in the management or control of the corporate debtor. Further, the investigating authorities should not have submitted or filed a complaint against the person and must not have reasons to believe that the person abetted or conspired to commit the offence.

While ongoing investigations against original promoters will continue, the new promoters would be required to extend all assistance and cooperation to the investigating authorities investigating an offence committed prior to the commencement of the corporate insolvency resolution process (CIRP).

Proviso to Section 5(12) has been omitted due to which IRP would be appointed on CIRP Commencement date and hence that will be the date of admission of an application under IBC. Insertion of "and such other debts as may be notified" U/S 5 (15) has widened ) the Scope of Interim Finance.

Section 16 of the IBC has been amended to provide that IRP shall be appointed on the date of insolvency commencement date.

U/S 21(2) the words “or completion of such transactions as may be prescribed.” Shall be inserted after the words “convertible into equity shares.”

The substitution in the Proviso of sub-section (1) of Section 23 of the Code clarifies that a IRP shall manage the affairs of the corporate debtor till the approval of Resolution Plan under sub-section (1) of Section 31 or, till appointment of liquidator under Section 34 by the adjudicating authority.

The explanation inserted in Section 227 of the IBC clarifies that the insolvency and Liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.


Written By:
  1. CS Jaya Sharma (Author), Founder - Jaya Sharma & Associates, Practising Company Secretary, Mumbai, Maharashtra - Email:[email protected]
  2. Jatin Gade (Co-author), Associate - Jaya Sharma & Associates - Email: [email protected]

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