The Cabinet will likely consider a proposal on Wednesday to bring in an ordinance to effect major changes to the Insolvency and Bankruptcy Code (IBC), ranging from narrowing an exclusion criterion to boost the number of bidders for stressed assets and treating home-buyers as financial creditors to allowing promoters of small businesses who are not wilful defaulters to bid. The ordinance will be based on the changes suggested in a report by a 14-member Insolvency Law Committee, headed by corporate affairs secretary Injeti Srinivas. A draft Cabinet note has already been circulated by the corporate affairs ministry for this purpose, said an official source.
The ordinance will seek to address the problem of unintended disqualification of bidders by streamlining Section 29A of the IBC. Only those who contributed to defaults of the company or are otherwise undesirable would be rendered ineligible.
The ordinance will narrow the scope of disqualifications under 29A of the code by making way for a carve-out for pure-play financial entities. Applicants holding an non-performing asset account due to the acquisition of a corporate debtor will be exempted from the disqualification criteria under Section 29A. However, such financial entities will be defined in the code to clarify the scope of the exemption, which will, however, not be applicable to financial entities if they are related parties of the corporate debtor.
Also, where disqualification is personal in nature, it will not result in exclusion of related parties. The ordinance will provide for a proper definition of ‘related parties’ of individuals under the IBC.
A case admitted for resolution can be withdrawn (before the plan is approved) by the appellate body if 90% of creditors agree. This means even unsuccessful bidders may stand a chance to bid for a stressed asset if they sweeten their offers, which could ultimately lead to a lower haircut by creditors. The vote share required for approving a plan for resolution or liquidation by the committee of creditors is to be reduced to 66% from the current 75%.
Home-buyers, who were not recognised as a category of lenders earlier, will be accorded the status of financial creditors like banks. Accordingly, home-buyers will form a part of the committee of creditors (CoC) that approves a resolution plan and their voting rights will be in step with their advances. Also, it could also allow people to file resolution applications on behalf of the financial creditors as their guardians or the administrators or executors of their estates or their debenture trustees. Similarly, representatives will be permitted to vote on behalf of certain creditors — exceeding a threshold — at meetings of the CoC. This move is aimed to help mainly home-buyers.
The ordinance could also provide for a clarification that guarantors of a corporate debtor are ineligible if the guarantee has been invoked by the creditor and remains unpaid in full or in part. Also, a moratorium will not apply to the surety of guarantors to the corporate debtor.