Modi govt could relax ‘related party’ clause of IBC law; experts warn one size doesn’t fit all

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Updated: Dec 29, 2018 12:06 PM

However, now the government is mulling relaxing one of the components under the Section 29A of the IBC -- the related party criterion -- which, experts say, should be exercised carefully.

Insolvency and Bankruptcy Code, Bankruptcylaw, ibc, National Company Law TribunalThe Insolvency and Bankruptcy Code (IBC) is arguably the government’s crown jewel.

The Insolvency and Bankruptcy Code (IBC) is arguably the government’s crown jewel. Especially, the move to bar wilful defaulters, defaulter promoter, and related parties from the bidding process of a bankrupt company was hailed as a masterstroke.

However, now the government is mulling relaxing one of the components under the Section 29A of the IBC — the related party criterion — which, experts say, should be exercised carefully. The government must not take a “one-size-fits-all” approach, they warn.

The government is considering relaxing the ‘related party’ criterion, which will make it less restrictive and will also allow relatives of defaulting promoters to bid for stressed assets if they establish that there are no business ties.

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How the criterion has impacted cases:

Recently, in the case of Essar Steel, the bidders — ArcelorMittal and Numetal — were held ineligible due to the related party clause. Numetal had Rewant Ruia, the son of Essar Steel promoter Ravi Ruia, as beneficiary, while ArcelorMittal owned 29.05% stake in defaulter Uttam Galva. ArcelorMittal’s bid for Essar Steel was finalised after it paid outstanding dues of Uttam Galva to the tune of Rs 7,000 crore.

Experts have argued that while this clause has been instrumental in keeping defaulter promoters from getting a backdoor entry to acquire bankrupt companies at a discounted price, its definition is too broad and disqualifies many people even as there is no business tie.

For example: In the case of bankrupt Monnet Ispat, the related party clause created some confusion. The only bidder of the company was AION Capital-JSW Steel consortium. JSW Steel promoter Sajjan Jindal is the brother-in-law of Monnet Ispat’s founder Sandeep Jajodia. The lenders had to take legal opinion before finalising the bid.

Related party: the definition

In June this year, the government defined the term “relatives” or “related party” through an amendment in August. The definition stated that a related party means anyone in relation to the individual (defaulter promoter) or their spouse; partner in a partnership firm or trustee in a trust in which the defaulter individual is associated; a private company in which is the individual is a director and holds over 2% share capital including family and relatives, among others.

Relaxation = Backdoor entry for defaulter promoter or maximization of asset value?

“It is true that the present criterion of related parties, while weeding out dubious promoters, also keeps out genuine resolution applicants which are not related parties in terms of business but fall within the ambit of its statutory definition,” Punit Dutt Tyagi, Executive Partner, Lakshmikumaran & Sridharan Attorneys told FE Online.

He said that while taking the decision to relax the criterion, it must not be forgotten that it was first placed to prevent backdoor entry of dubious promoters.

“A one-size-fits-all approach will do more harm than good, and the legislature has to tow a fine line between protecting the interests of the creditors and not harming them. Any amendments that are brought in, have to provide strict qualifying parameters to prevent dubious promoters from regaining control of the corporate debtor and its assets,” he added.

Analysts, overall, welcome the move to revisit the criterion and tweak it to ensure that genuine business parties do not get excluded from the bidding process.

Tyagi said that if the genuine resolution applicant is kept out of the process, the creditors suffer and the value of the asset is not maximised, contrary to the intent of the IBC — which is to maximise the recovery for lenders.

Siddharth Mahajan, Partner at Athena Legal shares similar views. However, he also points out that the core tenets of section 29A, which bar wilful defaulters and defaulter promoters, are not getting relaxed.

“The relaxation of related party norms would certainly lead to increase in the value of the assets under IBC since the pool of potential bidders will increase, and since the core tenets of section 29A are unlikely to be relaxed so bad promoters are not likely to benefit in any significant manner. The proposed change would be beneficial to banks who can expect to recover more,” Mahajan said.

Dhaval Vussonji of Dhaval Vussonji & Associates has said that if two people are not doing business together, they should not be disqualified only because they are related to each other. “A relaxation of the conditions will lead to maximization of value and make the process will become fairer and inclusive,” he added.

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