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RBI GR B | SEBI GR A 2019

INSOLVENCY & BANKRUPTCY


CODE, 2016
CURRENT AFFAIRS & UPDATES

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COVERAGE AREAS
First IBC Amendment (Nov 2017) – Already Covered in Detail

Second IBC Amendment (June 2018) – Already Covered in Detail

SC Judgement: Brilliant Alloys v/s S Rajagopal & Others (Dec 2018)

SC Judgement: Swiss Ribbons v/s Union of India (Jan 2019)

Other Important News & Events

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First IBC Amendment (Nov 2017)
What is the change Why was it made What does it mean
Provision introduced to bar Defaulters prevented from regaining
Introduction of Section 29 A. promoters from bidding for their control of their companies at a
companies. cheaper value.
Persons who have remained in
management or control of an
To ensure that all defaulters are Create a credit culture that
account that has been an NPA for
excluded from bidding. discourages defaults.
more than 12 months barred from
bidding.
To ensure maximum consent
Resolution plans need to be Smaller creditors have a say in the
amongst the committee of creditors
approved by 75% of creditors. insolvency resolution process.
(CoC) is achieved.

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SECOND IBC AMENDMENT (JUNE 2018)
What is the change Why was it made What does it mean
Promoters can offer settlement to creditors
Introduction of Sec12 A (Dealing with To provide creditors option to withdraw
before bankruptcy proceedings start and regain
withdrawal of insolvency proceedings insolvency application within 30 days of filing
control of company provided 90% of creditors
against a company). petition.
agree.
Promoters of MSMEs can regain control of their
Promoters of MSMEs allowed to bid for companies Banks can reach an amicable
Difficulty in finding buyers for smaller companies.
their companies. agreement on the quantum of ‘haircut’ via a
court-monitored process.
Discourages real estate developers from
To give home owners, who also provide funding
Home buyers to be treated as financial defaulting on commitments not only to banks
for projects by making advance payments, a voice
creditors. but also to their customers.
in the insolvency proceedings.

To give more say to larger creditors and increase


Resolution plans can be approved by
probability of reaching a resolution by reducing More insolvency processes can reach resolution.
66% of creditors.
quorum and space for dissent by creditors.
To widen the pool of bidders and increase
Financial entities who are not related
probability of cases being resolved. Unnecessary disqualification criteria are done
parties of promoter but own equity
away with.
shares in a defaulter co allowed to bid.

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SC Judgement: Brilliant Alloys v/s S
Rajagopal & Others (Dec 2018)
What is the change Why was it made What does it mean
Gives options for settlements between banks
SC allows withdrawal of and defaulting promoters if 90% of creditors
Change came about to accommodate
insolvency proceedings agree even at a later stage in the process.
for ‘exceptional cases’ where
against a company after Provision used by promoters such as Ruias of
proceedings have begun but
process has started (It is Essar Steel and Sanjay Singal of Bhushan
promoter wants to make a better
reinterpretation of Sec Power and Steel to seek withdrawal of
financial offer.
12A). insolvency process against their companies
and propose better financial offers

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SC Judgement: Swiss Ribbons v/s
Union of India (Jan 2019)
What is the change Why was it made What does it mean
Easing of criteria dealing with eligibility
of ‘connected persons’ and ‘related
parties’ bidding for companies under To make allowances for bidders
The potential pool of bidders for
insolvency process. who may be related to
large assets can be widened as
defaulting promoters but never
many families in India Inc are
Persons defined as ‘relatives’ will face had any business dealing with
related through marriage.
disqualification under Sec 29 A only if them.
they have a business connection.

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OTHER IMPORTANT NEWS & EVENTS

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Supreme Court quashes RBI’s circular
Mandating Insolvency Proceedings
• Supreme Court has struck down a February 2018
Reserve Bank of India (RBI) circular which gave lender
banks six months to resolve their stressed assets or
move under the Insolvency Code against private
entities who have defaulted in loans worth over Rs
2000 crore.

• RBI had defended the circular by citing public


interest and “in the interest of the national economy
to see that evergreening of debts does not carry on
indefinitely”.

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Observations made by SC
• Court accepted the argument made by the petitioners that the applying the 180-day limit to all
sectors, without going into the special problems faced by each sector, would “treat unequals
equally” and is violative of Article 14 of the Constitution.

• RBI circular sourced its power from Section 35AA of the Banking Regulation (Amendment) Act of
2017. It states that central government may, by order, authorise the Reserve Bank to issue
directions to any banking company or banking companies to initiate insolvency resolution process
in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016”.

• But the RBI circular missed two vital factors viz. authorisation of the government and the general
nature of the circular which did not concern a “specific default”.

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SC upholds constitutional validity of IBC
• Supreme Court on January 25, 2019 upheld the
constitutional validity of the Insolvency and
Bankruptcy Code (IBC).

• A Bench headed by Justice R.F. Nariman upheld the


constitutional validity of the code “in its entirety”.
However, the apex court said that related parties in
the Act should mean a person connected with the
business.

• The Bench disposed of a batch of pleas filed by


companies challenging various provisions of the IBC.

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Insolvency resolution framework for
individuals set to be issued shortly
• The government is soon expected to put in place a
framework for insolvency resolution in case of personal
guarantors to corporate debtors, and take up the issue of
debt resolution in case of proprietorship and
partnerships in the second phase.

• As the Insolvency and Bankruptcy Board of India (IBBI)


has already finalised the norms for individual bankruptcy
resolution in case of personal guarantors, the government
is expected to notify these soon.

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More about the News
• Under the Insolvency and Bankruptcy Code (IBC), a corporate debtor or a financial creditor can take listed
and unlisted companies to the National Company Law Tribunal (NCLT) for initiating a time-bound corporate
insolvency resolution process (CIRP).

• IBC requires that resolution should be done within 180 days and a grace period of 90-days could be
accorded, bringing the maximum time to 270 days.

• However, no such framework is currently available in the case of personal guarantors to companies,
partnership firms and individuals.

• Under the new framework, individuals have been divided into three categories: personal guarantors,
proprietors and the third is common individuals. With the start of resolution in case of guarantors, both the
number and the amount involved for resolution under the IBC will go up significantly.

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IBBI and SEBI sign pact for Effective
Implementation of IBC
• Insolvency and Bankruptcy Board of India (IBBI) and
Securities and Exchange Board of India (SEBI) have
signed a Memorandum of Understanding (MoU)

• to assist and co-operate with each other for the


effective implementation of the Insolvency and
Bankruptcy Code.

• IBBI is the regulator for overseeing insolvency


proceedings and entities.

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Components of the MoU
• Sharing of information between the two parties.
• Sharing of resources available with each other to the extent feasible and legally permissible.
• Periodic meetings to discuss matters of mutual interest, including regulatory requirements that impact
each party’s responsibilities, enforcement cases, research and data analysis, information technology
and data sharing, or any other matter that the parties believe would be of interest to each other in
fulfilling their respective statutory obligations.
• Cross-training of staff in order to enhance each party’s understanding of the other’s mission for
effective utilisation of collective resources.
• Capacity building of insolvency professionals and financial creditors.
• Joint efforts towards enhancing the level of awareness among financial creditors about the importance
and necessity of swift insolvency resolution process of various types of borrowers in distress under the
provisions of the Code.

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Two years of insolvency and
Bankruptcy Code (IBC)
• Finance Minister states that the recovery under the IBC was
satisfactory and highlights the ways under IBC through which the
money was recovered.

• Finance Minister notes that so far 1322 cases have been admitted by
NCLT. 4452 cases have been disposed at the pre-admission stage and 66
have been resolved after adjudication.

• 260 cases have been ordered for liquidation. In 66 resolution cases, the Union Finance Minister
realization by creditors was around Rs. 80,000 crores. Arun Jaitley has written a
Facebook post titled ‘Two
years of insolvency and
Bankruptcy Code (IBC)”

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MORE ABOUT THE NEWS
• The section 29 A of IBC mandated that persons who have contributed to the defaults of the
corporate debtor or are undesirable due to incapacities as specified in the section or are a ’related
party’ to another defaulting party, are prevented from gaining control of the corporate debtor by
being declared ineligible to submit a resolution plan under the Code.
• As a result, the companies are paying up in anticipation of not crossing the red line and being
referred to NCLT.
• Many debtors are paying up once the creditor has filed the petition at a pre-admission stage so
that the declaration of insolvency does not take place.
• NCLT has resolved some major cases & many are on the way of resolution.
• There has been a definite improvement in the lending and borrowing behaviour, an increase in
the conversion of NPAs into standard accounts and decline in new accounts are a testimony to
this fact.

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MCQs for Practice

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QUESTIONS FOR PRACTICE
QUESTION 1

Q. Section 29A of IBC Code, often seen in news, relates to:

1. Barring promoters from bidding for their companies


2. Resolving insolvency in a time-bound manner
3. Constitution of Insolvency and Bankruptcy Board of India
4. None of the above

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QUESTIONS FOR PRACTICE
QUESTION 2

Q. Consider the following statements and identify the correct ones:


(A) In Feb. 2018, RBI issued a circular which gave lender banks six months to resolve their
stressed assets or move under the Insolvency Code against private entities who have
defaulted in loans worth over Rs 2000 crore.
(B) The above circular has been struck down by Supreme Court citing constitutional violation
and regulatory overreach.
1. (A) only
2. (B) only
3. Both of the above
4. None of the above

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QUESTIONS FOR PRACTICE
QUESTION 3

Q. Recently in Jan. 2019, a Supreme Court bench upheld the constitutional validity of the
Insolvency and Bankruptcy Code (IBC). The bench was headed by:

1. Justice R.F. Nariman


2. Justice Ranjan Gogoi
3. Justice Deepak Gupta
4. None of the above

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QUESTIONS FOR PRACTICE
QUESTION 4

Q. Recently, Insolvency and Bankruptcy Board of India (IBBI) and Securities and Exchange
Board of India (SEBI) have signed a Memorandum of Understanding (MoU) in respect of:

1. Sharing of information between the two parties


2. Enhancing the level of awareness among financial creditors
3. Cross-training of staff
4. All of the above

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QUESTIONS FOR PRACTICE
QUESTION 5

Q. Which of the following is not one of the impacts of introduction of Insolvency and
Bankruptcy Code (IBC)?

1. Many debtors are paying up


2. Improvement in the lending and borrowing behaviour
3. Conversion of standard accounts into NPAs
4. All are impacts of IBC

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SOLUTIONS

1. (1)
2. (3)
3. (1)
4. (4)
5. (3)

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Query
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