Insolvency and Bankruptcy code being changed, wilful defaulters can’t bid for stressed assets

Sunny Verma, New Delhi | Updated: November 23, 2017

The Union Cabinet approved the promulgation of an ordinance Wednesday to amend the Insolvency and Bankruptcy Code (IBC) to streamline the stressed-assets resolution process and effectively bar wilful defaulters from bidding for companies being put up for sale under the IBC. Sources said the ordinance was being sent to the President and his approval was expected “very soon.”

Briefing reporters on the decisions of the Cabinet, Finance Minister Arun Jaitley spoke of the approval for the ordinance to make “some changes” in the IBC but did not provide any other detail. Government sources said the amendments to the IBC “explicitly prohibit persons declared as wilful defaulters” or those having a history of siphoning funds from a company, or convicted of fraud, from submitting a resolution plan for companies that are going through the corporate insolvency resolution process.

The changes also empower the Insolvency and Bankruptcy Board of India (IBBI) to outline further eligibility requirements for applicants bidding for companies under resolution. While these changes are being made to prevent fraudulent promoters/wilful defaulters from taking over companies going through resolution, there is no plan to prevent existing promoters from submitting a resolution plan for their own companies, the sources said.

“It is, in fact, likely that an existing promoter will put in a higher bid to acquire the company. So when they compete with other resolution applicants, the bid amount is expected to go up, resulting in banks realizing the best value for stressed assets,” a senior finance ministry official said.

The government had, last year, enacted the IBC and earlier this year empowered the Reserve Bank of India (RBI) to direct banks to initiate insolvency proceedings against large loan defaulters. Subsequently, banks initiated insolvency resolution against the 12 large NPA cases by referring these to the National Company Law Tribunal benches. These companies including Jyoti Structures, Bhushan Steel, Monnet Ispat and Electrosteel Steels, Amtek Auto and Era Infra Engineering among others — these account for a combined debt of around Rs 2.5 lakh crore.

A total of over 300 cases have been admitted for resolution with various benches of the NCLT under the Code. In some of the 12 large cases, resolution plans have been submitted by the related parties, and concerns have been raised on existing promoters wresting back control of companies under resolution at cheap valuation.

Incidentally, in the first case for which a resolution plan was approved under the IBC, the Hyderabad bench of NCLT, approved the amalgamation of Synergies Dooray Automotive with with a related company Synergies Castings. The resolution involved the lenders taking a haircut as high as 94 per cent from the total claimed value of Rs 972.15 crore. “It will be a setback to the credible IBC process if the existing promoter re-acquires the asset with a haircut, without Right of Recompense to Banks. The government must closely monitor the proceedings of NCLT,” Sajjan Jindal, Chairman and MD of JSW Group, said in a tweet on Tuesday.

The ordinance also proposes to disallow sale of property to a person who is disqualified to be a resolution applicant. The amendments explicitly provide that the Committee of Creditors consider viability of the resolution plan at the time of approval. Apart from the amendments, the government has also inserted two new Sections to the IBC. While Section 23 5A has been added to provide for punishment for contravention where no specific penalty or punishment has been provided, Section 29 A has been inserted to prevent an “un-discharged insolvent” from participating in the resolution plans, sources said.

Section 29A also provides for disallowing an account declared as non performing asset (NPA) for one year or more for being a resolution applicant. “Persons who have indulged in preferential transaction, undervalued transaction, fraudulent transactions or who have been disqualified by the government to be a director in a company — these persons cannot be resolution applicants,” the sources said.

The proposed changes to the IBC, however, do not address the concerns of homebuyers stuck with undelivered flats by companies that are now undergoing resolution. The IBC currently overlooks the interests of the buyers who have booked the property but are yet to get it registered in their names. In such a case, the IBC does not provide any remedy to the homebuyers even though they have paid most of the apartment cost.

In another decision, the Cabinet approved the setting up of the Fifteenth Finance Commission (FFC) that will decide the distribution of tax proceeds among the Centre, states and local bodies for the five year period starting April 1, 2020 to March 31, 2025.

Jaitley said it usually takes two years for the Finance Commission to finalise its recommendations. The exercise is likely to be different this time due to roll out of the Goods and Services Tax, he said.

Reference

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