Insolvency Regulations: IBBI tightens noose around default by winning bidders

By: | Published: January 26, 2019 12:52 AM

However, the UK-based firm could not make the promised upfront payment in time.

The resolution professional would also have to attach the evidence of the performance security while submitting the resolution plan with NCLT for approval.

Months after UK-based Liberty House failed to meet its payment commitment to acquire stressed Amtek Auto, the insolvency regulator has tightened regulations to mandate that successful resolution applicants will have to provide a “performance security” and a default may also cost them the chance to bid in future. The winning bidder will forfeit the security if it fails to implement the resolution plan under the Insolvency and Bankruptcy Code (IBC) or contributes to its failure once the National Company Law Tribunal (NCLT) approves it.

Not just that, the Insolvency and Bankruptcy Board of India (IBBI) said the resolution plan for a stressed firm will also include a statement as to whether the resolution applicant or any of its related parties has “failed to implement or contributed to the failure of implementation of any resolution plan” in the past. This means if Liberty House doesn’t finally meet its commitment in the Amtek case, it may not be allowed to bid for stressed assets in future.

Notifying the Insolvency Resolution Process for Corporate Persons (Amendment) Regulations, 2019, the IBBI has said: “The amendment mandates that the request for resolution plans shall require the resolution applicant, in case its resolution plan is approved by the committee of creditors, to provide a performance security.” Performance security means “security of such nature, value, duration and source, as may be approved by the committee of creditors, having regard to the nature of resolution plan and business of the corporate debtor”, it added. The security may be in the form of a bank guarantee.

The resolution professional would also have to attach the evidence of the performance security while submitting the resolution plan with NCLT for approval. The changes take effect immediately.
While scores of successful bidders for stressed companies failed to make the promised payments on time, the most prominent has been that of Liberty House. Creditors have now approached the NCLT, seeking action against Liberty House.

Delhi-based Amtek Auto’s insolvency resolution process was initiated on Corporation Bank’s plea. Amtek’s total dues to lenders at the time when the company was admitted by the Chandigarh bench of NCLT was `12,603 crore. NCLT on July 25 approved Liberty’s plan that sought to pay financial creditors `3,225 crore upfront and make a fresh infusion of `500 crore into the company for improving operations. However, the UK-based firm could not make the promised upfront payment in time.

Corporate affairs secretary Injeti Srinivas had earlier said that Section 74 of the IBC provides enough legal resources for the government to “deal with any defaulting resolution applicant”. He had said that regulations could be tweaked to include earnest money deposit as a certain percentage of bid value or liquidation value, which can be forfeited” if an approved resolution plan is not implemented by the bidder.

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