Narendra Modi government’s tough insolvency law cleared, promoters put out

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New Delhi | Published: November 24, 2017 5:27:34 AM

If promoters want to bid for their companies at NCLT, must bring in funds to make the loans ‘standard’ first

Ram Nath Kovind, Insolvency and Bankruptcy Code, debt accounts, non performing assets, Essar Steel, Securities and Exchange Board of India, committee of creditors According to analysts, the amendments could cause disruption in nearly all pending insolvency proceedings as the eligibility of all bidders will have to be ascertained before examining their bids. (IE)

With President Ram Nath Kovind’s assent to an ordinance on Thursday, the government has effected sweeping changes to the Insolvency and Bankruptcy Code (IBC), 2016, to prevent wilful defaulters, dubious promoters, undischarged insolvents and other “unscrupulous, undesirable persons” from misusing the law. In fact, the scope of the changes is so enormous that most of the promoters of over 300 stressed companies, including a dozen large bad debt accounts recommended by the central bank where the insolvency resolution process has been initiated, will be disqualified from acquiring assets of such firms, said analysts. Also, the roughly 3 lakh directors who were recently disqualified following the government’s drive against shell firms will also be ineligible to submit a resolution plan.

According to analysts, the amendments could cause disruption in nearly all pending insolvency proceedings as the eligibility of all bidders will have to be ascertained before examining their bids. Earlier, the resolution plan had to qualify for consideration; now the bidder has also to qualify, they noted. According to the ordinance, the changes also bar those whose accounts have been classified as non-performing assets (NPAs) for at least a year, or have executed an enforceable guarantee involving a corporate debtor undergoing insolvency resolution or those who are habitually non-compliant from acquiring stressed assets in insolvency resolution or liquidation process.

So, for instance, if the accounts of, say, the Ruias have been classified as NPAs for over a year, they can’t bid for the assets of Essar Steel without first clearing the overdue amounts with interests and other charges. Moreover, those who are promoters or in the management of control of the resolution applicant, or will be promoters or in the management of control of the corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party will also stand disqualified to submit a resolution plan. Importantly, the committee of creditors (CoC) will reject a resolution plan that is submitted before the commencement of the ordinance but is yet to be approved where the resolution applicant doesn’t meet the latest changed criteria. In such cases, the CoC may invite fresh resolution plans.

To ensure the changes are enforced effectively, the newly introduced Section 235A provides for fines for the contravention of the law, which would be at least Rs 1 lakh but may extend up to Rs 2 crore. The amendment also provides certain checks by specifying that the CoC ensure the viability and feasibility of the resolution plan before approving it. The analysts said such changes will also lead to a litany of legal tussles, especially over the issue of wilful and other defaulters, and may delay the insolvency resolution process. Importantly, since it could potentially disqualify a whole cross-section of people from making resolution applications under IBC and participating in competitive bidding, the value of stressed assets that are put on the block could remain depressed or lower than expected.

Also disqualified are those who have been convicted for any offence punishable with imprisonment for two years; those who have been already disqualified as directors of companies; those who have been prohibited by the Securities and Exchange Board of India from trading in securities; and those found by an adjudicating authority to have been indulged in fraudulent, preferential or undervalued transactions. In all, the ordinance amends Sections 2, 5, 25, 30, 35 and 240 of the IBC and inserts new Sections 29A and 235A in the code, which provide for these changes. Insolvency law expert Sumant Batra said: “The amendments are unduly harsh to bona fide defaulters and guarantors. Just because an account has turned non-performing does not render its promoter dishonest. Every default cannot be equated to malfeasance. There are many honest promoters who may have defaulted for reasons beyond their control. Modern insolvency laws are built on the principle of granting a fresh start to the honest but unfortunate debtor. It is unfair to exclude them from consideration by bracketing them with dishonest promoters.”

Experts also feel that amendments might place foreign bidders in an advantageous position as the concept of wilful defaulters might not exist in other countries and the disqualification criteria in corresponding situations could be different or even harsher, posing challenge for resolution applicant in determining eligibility of foreign bidders. According to an industry official who wished not to be named, since the ordinance purports to disqualify a whole cross-section of people from making resolution applications under IBC, it will reduce the pool of resolution applicants, who can participate in competitive bidding for the assets which are put on the block and in turn will depress the value of the assets and ultimately cause a loss to the banking sector itself. However, State Bank of India chairman Rajnish Kumar said the bar on promoters from bidding would not bring down the valuation because “there is a lot of interest in these assets”. “The valuation has nothing to do with whether existing promoters are allowed to bid or not allowed to bid. The asset will go only on the fair value of the enterprise,” Kumar said.

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