Insolvency bids: Defaulting winners may land in jail

By: | Updated: December 5, 2018 6:52 AM

Jail-term provision may be invoked, debarring such successful bidders; earnest money deposit under consideration, says corp affairs secy.

It is likely to amend the law to bar such firms from bidding for stressed assets and tweak norms to mandate that bidders deposit earnest money that can be forfeited in case of violations.

Concerned over several instances of successful bidders under the insolvency resolution process for stressed companies failing to make the promised payments on time — the most prominent one being that of UK-based Liberty House in the Amtek Auto case — the government is mulling to invoke a stringent provision in the Code, that provides for a jail term, to deal with such wilful defaulters among winning bidders.

It is likely to amend the law to bar such firms from bidding for stressed assets and tweak norms to mandate that bidders deposit earnest money that can be forfeited in case of violations.
Section 74 of the Insolvency and Bankruptcy Code (IBC) says ‘any person’ bound by an approved resolution plan “knowingly and wilfully contravenes any of the terms of (such plan)… shall be punishable with imprisonment of not less than one year, but may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both”.

Speaking to FE, corporate affairs secretary Injeti Srinivas said Section 74 provides enough legal resources for the government to “deal with any defaulting resolution applicant”. If any case is found to be fit for use of Section 74, the government wouldn’t hesitate to do it, he said, adding that such steps would be vital for maintaining integrity of the resolution process.

Srinivas added that the government might look at including dishonouring of an NCLT-approved plan as one of the disqualification criteria under Section 29A (which bars wilful corporate defauters from submitting bids under IBC process). “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.

On use of Section 74, the official, however, added that for the use of the section, it would require to be established before law that such defaults amounted to wilful contravention of the NCLT-approved resolution plan. He refused to comment on specific instances of defaults by successful bidders under IBC.

While the IBC is sufficiently stringent to bar entry of wilful corporate defaulters into the corporate insolvency resolution process (CIRP), it hasn’t been clear to many whether it has the teeth to punish successful bidders reneging on their promises.

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. Liberty’s House bid was approved by the lenders on April 4, 2018 by a 94.2% vote. NCLT on July 25 approved Liberty’s plan that sought to pay financial creditors `3,225 crore upfront and make 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, the lenders last week decided to move the NCLT, seeking directions on the way forward.

According to reports, there have been a few other instances as well where winning bidders have failed to pay up for the stressed firms they proposed to acquire for various reasons, including the inability to raise money to fund such acquisitions.

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