Alternatives to I&B Code for Restructuring under Section 230 of The Companies Act, 2013
In a press conference conducted on May 17, 2020 by Finance Minister Nirmala Sitharaman, it was stated that the COVID-19 related debts shall not form part of the default under the Insolvency and Bankruptcy Code, 2016 (I&B Code). Further, by proposing Section 10A, it was stated that there shall be no fresh initiation of new cases under Section 7, 9 and 10 of the IBC for a period of 1 year. The President’s assent is awaited for section 10A of the I&B Code.
This is done to mainly protect the Micro, Small, Medium Enterprises (MSME’s) for which a special insolvency framework has been proposed by the Ministry of Finance which will be introduced under Section 240-A of the I&B Code. It has been announced by the Finance Minister that the said Insolvency framework will be notified soon under Section 240-A of the Code.
IMPLICATIONS OF SUSPENSION OF SECTION 7, 9 and 10 OF I&B CODE, 2016
Suspending fresh applications under the I&B Code will definitely take away the creditors’ option of enforcing their rights under the Code but will not render them remediless. They will always have the alternative remedy available under Section 230 of the Companies Act, 2013.
Section 230 of the Companies Act, 2013 provides for a scheme of compromise or arrangement between the company and its creditors or class of creditors or members or class of members.
“Section 230. (1) Where a compromise or arrangement is proposed—
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them,
the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, [“appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be,”] order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.
Explanation.—For the purposes of this sub-section, arrangement includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods…….”
Another remedy which could be availed is the out-of-court restructuring as provided by the Reserve Bank of India (RBI) in its circular dated 7th June 2019. This prudential framework circular provides for the debt restructuring through the inter-creditor agreement (ICA) entered into by the RBI regulated lenders.
RBI has called for a 3-month moratorium on the repayment of loans and has also revised contractual relationships between the debtors and the financial institutions.
MAJOR REQUIREMENTS OF THE SCHEMES UNDER SECTION 230 OF THE COMPANIES ACT, 2013
Proposal of the Scheme:
Section 230 provides for filing of the scheme by a creditor (or class of creditors) or a member (or class of members) or by the liquidator himself. If approved, then the scheme becomes binding on the company, its creditors and members. Also, the Act provides for a provision for the third party to propose a scheme and become contractually bound by the same.
Approval of the Scheme:
The Corporate Debt Restructuring Scheme provides for prior approval of minimum 75% of the value of the secured creditors before it’s presented to the NCLT for approval. Further, it requires the approval of 75% of the value of creditors (or class of creditors) or members (or class of members) which then becomes binding on them and the company.
THE PARADOX BETWEEN SECTION 230 AND PROVISIONS OF I&B CODE
- Unlike the I&B Code, where only the Financial Creditors can become a part of the Committee of Creditors and can vote and draw a resolution plan for the Corporate Debtor. Section 230 of the Companies Act, 2013 provides for submission of restructuring, compromise, composition and arrangement scheme by any of the creditors (be it secured or unsecured).