The Cabinet on Wednesday decided to bring in a crucial ordinance to amend the Insolvency and Bankruptcy Code (IBC), 2016, which will likely bar wilful defaulters, including such promoters, and persons convicted of fraud, among others, from submitting resolution plans for a stressed firm. Official sources told FE that the proposed changes are aimed at tightening the IBC further to prevent unscrupulous elements, including dubious promoters,from bidding for assets of stressed companies. However, promoters in general won’t be barred from participating in bidding for now. The sources said the proposed changes that were placed before the Cabinet for approval include barring wilful defaulters, undischarged insolvents and those whose accounts have been declared non-performing assets (NPAs) by the Reserve Bank of India for a year or more from becoming a resolution applicant.
Even those convicted of fraud or found guilty of siphoning off money earlier from any company, disqualified directors and people who were found to have been indulged in “preferential” and/or “undervalued” transactions will be ineligible to submit resolution plans. This means the roughly 3 lakh directors who were recently disqualified following the government drive against shell firms are also disallowed, unless they manage to get reprieve from the relevant authority (judicial or otherwise). Sources said in the initial phase of Corporate Insolvency Resolution Process (CIRP) under the IBC, a number of cases are likely to have long-pending defaults requiring deep haircuts for the creditors. It is, therefore, necessary to ensure that promoters of the corporate debtor who are found to have contributed to the default need to be prevented from regaining control through the back door in the garb of a resolution applicant.
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Since a number of corporate debtors undergoing CIRP are passing the stage of submission of resolution plans and their approval, it has become imperative to take immediate action to prevent undeserving person from taking over the corporate debtors.
The sources said the Cabinet approved the proposal to promulgate the ordinance to amend the IBC with a view to improving the quality of insolvency resolution by prescribing eligibility criteria with respect to prospective resolution applicants and inserting a new section to lay down comprehensive criteria with respect to persons ineligible to be resolution applicants. These would, inter alia, include wilful defaulter, undischarged insolvent, disqualified director, a person who has indulged in preferential transaction or undervalued transaction or fraudulent transaction as determined by the adjudicating authority, and a person who is a promoter or in the management or control of such persons whose account is classified as NPAs beyond a prescribed duration.
The Cabinet also approved the proposal to provide for a “robust due diligence framework enabling the committee of creditors to make proper assessment of the creditworthiness, credibility and other relevant parameters of the applicant as may be prescribed by the Insolvency and Bankruptcy Board of India, before approving a resolution plan”. “All promoters need not be painted as wilful defaulters or dubious elements, as there could have been genuine reasons (like a global commodity crash or sudden domestic policy changes) for their business failure. If all promoters are disallowed, it will strike at the very root of entrepreneurship in the country, which we don’t want,” a senior government official said.
After Wednesday’s Cabinet meeting, finance and corporate affairs minister Arun Jaitley said the government intended to make some changes to the IBC through an ordinance. But he didn’t divulge details. Asked why the government wants an ordinance when Parliament session is likely to be convened only next month, Jaitley said: “The whole process is at an advanced stage and therefore you want the process to go on the right track.” The proposed changes to the IBC also suggest the committee of creditors weigh the viability of the resolution plan at the time of approval and bar the sale of property to a person who is disqualified to be a resolution applicant, according to the sources.
The proposals come amid mounting concerns about certain aspects of the IBC, including the possibility of “unscrupulous promoters” snatching back control of a stressed company through the insolvency process. JSW Steel’s Sajjan Jindal recently tweeted: “It will be a setback to the credible IBC process if the existing promoter reacquires the asset with a haircut without right of recompense to banks.” Sanjay Grover, managing partner at company secretary firm Sanjay Grover & Associates and an insolvency professional, said: “The move to bar unscrupulous wilful defaulters is a positive one. It was necessary to keep such unscrupulous elements out of the insolvency process. Otherwise, it would encourage more defaults.” The IBC came into existence as the government wanted to have a law to facilitate corporate insolvency in a time-bound and professional manner. It provides for the turnaround of stressed assets or, in case of liquidation, their quick monetisation.
