President’s nod for bankruptcy ordinance (TH)

President’s nod for bankruptcy ordinance (TH)

Context

Introduction of a new section to IBC

What has happened?

President has given his assent to the Ordinance approved by the Union Cabinet to amend the Insolvency and Bankruptcy Code (IBC) to strengthen the regime

What does the ordinance aims at?

• Safeguards: The Ordinance aims at putting in place safeguards. How?
• By prohibiting wilful defaulters, those associated with non-performing assets (NPAs), and the habitually non-compliant, from regaining control of the defaulting company or stressed assets through the back door in the garb of being a ‘resolution applicant’

Who is a resolution applicant?

A resolution applicant means any person who submits resolution plan to the resolution professional

• Prevent misuse of IBC: It aims to prevent unscrupulous, undesirable persons from misusing the IBC

Changes introduced

• Ineligible persons: A new section has been introduced in the IBC that makes certain persons ineligible to be a ‘resolution applicant’

Who are these ineligible persons?

• Wilful defaulters: Those being made ineligible include “wilful defaulters, those who have their accounts classified as NPAs for one year or more and are unable to settle their overdue amounts include interest thereon.”
• The ineligible persons also include 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 IBC
• Also ineligible are 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
• Punitive measures: A fine of not less than Rs 1 Lakh but it may extend to Rs 2 Crore
• Checks against ineligible persons: Committee of Creditors (CoC) will ensure the viability and feasibility of the resolution plan before approving it

What happens to the resolution plans submitted before the ordinance?

• 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 new norms
• In such cases, on account of the rejection, where there is no other plan available with the CoC, it may invite fresh resolution plans

Impact of these changes

• Strengthening of formal economy: Actions against defaulting companies, as well as weeding out of unscrupulous elements from the resolution process “would help strengthen the formal economy and encourage honest businesses and budding entrepreneurs to work in a trustworthy, predictable regulatory environment

What is an ordinance?

An ordinance is an executive order issued by the President of India that holds the same force and effect as an Act passed by the Parliament

• Article 123: The President has the power to issue ordinances under Article 123 of the Constitution. In reality, it is the Union cabinet that forwards proposals for issuing ordinances to the President who merely gives his assent

When are ordinances issued?

An ordinance can be issued only when both Houses of Parliament, Lok Sabha and Rajya Sabha, are not in session. It is meant as a last resort and not a tool to replace the power or functioning of Parliament. Also, ordinances should, generally, be issued only on pressing issues or issues that require immediate consideration that cannot wait for Parliament to assemble and consider the bill

• Reality: In reality, many times ordinances are issued by the government for lack of consensus in Parliament. If there is a possibility of a bill not being passed in the current session of Parliament, government can take the ordinance route pending its approval by the Parliament during a later session

Validity of an ordinance

An ordinance, once issued, is valid for six weeks from the date when the next session of Parliament starts. During this period, Parliament can either pass the ordinance turning it into an Act or disapprove the ordinance

• If the ordinance is not passed by Parliament, it can be re-promulgated or re-issued by the President (meaning government)
• There is no limit on how many times an ordinance can be re-issued but as per ruling of the Supreme Court, it cannot be re-promulgated endlessly without getting it to vote in the Parliament or Legislature
• The President can during this period, at any time, withdraw the ordinance

SC rulings

• In AK Roy vs. Union of India (1982) while examining the constitutionality of the National Security Ordinance, 1980, which sought to provide for preventive detention in certain cases, the Court argued that the President’s Ordinance making power is not beyond the scope of judicial review
• In T Venkata Reddy vs. State of Andhra Pradesh (1985), the Court held that the motives behind the exercise of this power cannot be questioned, just as is the case with legislation by the Parliament and state legislatures
• In DC Wadhwa vs. State of Bihar (1987), the  Supreme Court held that courts could strike down re-promulgated ordinances