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Section 74 of the insolvency and Bankruptcy Code

Section 74 of the insolvency and Bankruptcy Code

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  • GS 3|| Economy ||Banking & Financial Sector||Financial Regulators

 Why in News?

  • Section 74 of the Insolvency and Bankruptcy Code (IBC) has recently called upon against a company for its failure to comply with the approved resolution plan.

 Elements of IBC

  • IBC is single law/consolidated law for insolvency and bankruptcy in the nation.
  • Adjudicating Authority: Either the creditor (banks/loan providers) or the loaner (or even defaulter) can initiate insolvency proceedings on a defaulted company. Done by pleading to the adjudicating authority at the National Companies Law Tribunal.
  • After the admission, the lenders have to form a committee of creditors and appoint an insolvency professional. The Insolvency Professional acts as a resolution professional and run the borrower’s business in the interim period.
  • Committee of Creditors:Meanwhile, any resolution applicant may submit a resolution plan to the RP that is placed before the committee of creditors.
  • Resolution Plan:A resolution plan is supposed to be a bid or an offer for the corporate debtor, through which the debtor proposes to repay the bad debt or part of the bad debt of the corporate debtor.
  • The responsibility of approving a resolution plan rests with the Committee of Creditors (CoC), which will approve it NO less than 75% voting in favour of it.
  • Once the CoC approves the plan then it is subsequently approved by the adjudicating authority, and when authority also approves it, the final plan will be binding on the corporate debtors, involved in the resolution plan.

 Section 74

  • Penalizing Provisions:PSection 74 lays down the provisions to penalize officials of corporate debtors, creditors and bidders. If and when any of this party violates a resolution plan as approved by the adjudicating authority.
    • Violation of Resolution Plan:Officials of the corporate debtor who violate the norms can be imprisoned for a maximum term of five years and a penalty of up to Rs 3 lakhs.
    • Officials of creditors who violate the norms can be jailed for a maximum of five years and a penalty of up to Rs 1 crore.
    • Officials of bidders, who violate the norms, can similarly be imprisoned for a maximum tenure of five years and a penalty of up to Rs 1 crore.
  • These provisions are required to protect the Code from being taken lightly, and ascertain that the provision is being implemented as it is supposed to be.

 Case of Liberty House

  • The Liberty House, an international metals and industrial group, had made a successful resolution plan for a defaulted company, Amtek Auto in 2018. The terms of the resolution plan were also approved by the adjudicating authority (under the NCLT).
  • But, Liberty House couldn’t pay according to the resolution plan.
  • There were serious issues in the information and valuation reports shared with Liberty House before the bidding process, Liberty House States it.
  • Because of the noncompliance to the resolution plan, the lenders to Amtek Auto have moved the Chandigarh bench of the NCLT to invoke Section 74 against the Liberty House Group.
  • Once the Section 74 is invoked by the Committee of Creditors, it is up to the NCLT to decide on the course of action with respect to the corporate debtor.
  • The NCLT has two options in this scenario: Either to allow the resolution professional of the corporate debtor to invite fresh bids, or penalize the bidder who has not complied with those provision of jail and money fines.

 Concerns

  • The Section 74 hasn’t brought any seriousness into the entire corporate insolvency resolution process.
  • However, this could also deter the bidders from a market that anyway lacks good resolution plans.
  • It is also a bit unfair to penalize only the bidders because the litigation can happen because of the other bidders or debtors.
  • This is the first time that Section 74 is being invoked by lenders. So, whatever the decision NCLT will take in this regard will be a precedent for the future cases

 Additional Info:

  • NCLT:NCLT comes under section 408 of the Companies Act, 2013 (18 of 2013) w.e.f. 01st June 2016. Headquartered at New Delhi and it has 18 judicial members and 9 technical members.
  • Liberty House: Liberty House Group was founded in United Kingdom in 1992 by industrialist Sanjeev Gupta. It’s headquarter is in London.