Lots of loopholes, cracks and ambiguities have come to the fore in IBC’s 3-year journey but prompt action by the IBBI has helped to keep it relevant as the most effective law for insolvent entities.

– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

Constant Change & Improvement

Any law is effective only when it is capable of catering to maximum people or entities that are looking for a legal solution; and hence, bring satisfactory closure to the issue within a stipulated period. Thus, with time every law or act is amended and modified to remain relevant and true to its spirit, otherwise, it will stagnate and lose its very purpose.

The Insolvency and Bankruptcy Code (IBC) 2016, which is still in its infancy, has been facing teething problems as more and more cases of diversified nature are admitted. Taking a cue from all the cases, the Insolvency and Bankruptcy Board of India (IBBI) take prompt note of gaps, discrepancies and roadblocks and then work towards overcoming the glitches.

Changes in IBBI

In order to smoothen the process and achieve the real purpose of the IBC 2016, IBBI has amended and included new norms to the Code, time and again. Talking about its initiative, the Insolvency and Bankruptcy Board of India chief M S Sahoo pointed out that expeditious corrective measures have been taken for the insolvency law (IBC) to address the stakeholders’ needs which have helped in making the legislation robust.

IBBI plugs one more Loophole in IBC, 2016

If there are gaps or loopholes then it is inevitable that unscrupulous elements will resort to exploiting it to their benefit!

-Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

 Recently the Insolvency and Bankruptcy Board of India (IBBI) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulation.

These amendments in the IBBI regulations will help to plug in the loopholes in the IBC and will have far-reaching consequences. The former promoters who were till now able to make a backdoor entry in companies under liquidation will now be prevented from doing so. This move has been hailed as a positive step by the experts; one that they said is in line with the objective of the Insolvency and Bankruptcy Code, 2016.

Factors responsible for Amendments

IBC 2016 was framed with the intention to:

a) Expedite and simplify the process of insolvency and bankruptcy proceedings

b) Ensure fair negotiations between opposite parties

c) Encourage revival of the company by the formulation of a resolution plan

But there was a lacuna in the law that came in the way of fulfilling the real aim of the IBC, 2016. It laid down no specific criteria or qualification as to who could submit a resolution plan and therefore, a resolution applicant could be any person i.e. creditor, promoter, prospective investor etc.

This gap in the law gave elbow room to defaulting promoters to submit a resolution plan and acquire assets of the corporate debtor that too, at significantly discounted prices, thus, making a convenient backdoor entry.

When this discrepancy came to light, 29A was added to the Code by the Insolvency and Bankruptcy Code (Amendment) Bill, 2017. But the insertion of 29A failed to fill in all the gaps as lots of ambiguity remained to cause chaos and confusion. 

As a result, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 was introduced which was later replaced by the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018.

Salient features of IBC (Second Amendment) Bill, 2018

Firstly, IBC 2018 has modified the eligibility criteria and laid down a clear yardstick to the extent and applicability of the law under Section 29A. It has reduced and limited the exemptions that could be manipulated by resolution applicants to escape ineligibility.

Furthermore, the code has widened the ambit of section 29A by defining the term ‘related party’; in connection to an individual, it has brought a large number of people in the ineligibility criteria.

Likewise, the scope of the term ‘connected persons’ in section 29A has also been broadened and now in determining the connected persons of a married individual the relatives of the spouse of the individual will also be included.

In addition to these, ‘financial entity’ has been excluded from the scope of ‘related party’ of section 29A in the Code. Limited exemptions have also been provided to the MSMEs’ and now their promoters can submit a resolution plan if he/she is not a willful defaulter.

Case Study

A noteworthy case example that brings to light the wide scope of ‘ineligibility’ is that of the insolvency proceedings of Ruchi Soya Industries Ltd.

Adani Wilmar was declared the highest bidder by the committee of creditors and hence, a resolution plan was in the offing but then Patanjali Ayurved which was the second-highest bidder, raised a claim of ineligibility. Quoting provisions under Section 29A of the Code Patanjali Ayurved has challenged the decision of the committee of creditors and approached NCLT.

The complainant has pointed out that the spouse of the managing director of Adani Wilmar is the daughter of a defaulting promoter and hence, is ineligible. NCLT is yet to decide on the case.

Moreover, the Supreme Court in the case of Chitra Sharma and Ors. v. Union of India and Ors has very categorically stated that wilful defaulters shall not be allowed to participate in the corporate insolvency resolution process. Citing insertion of section 29A the Apex Court described it as a ‘plugging loophole’ and reiterated that strict adherence to its provisions should be compulsory.

Domain Experts give a Thumbs Up

Talking about these changes, Punit Dutt Tyagi, the Executive Partner of Lakshmikumaran and Sridharan Attorneys, explains, “This has been introduced to specifically overrule the decisions passed by some NCLTs, whereby it was held that no bar operated on the sale of secured assets to the ex-promoters of the Corporate Debtor if such sale is carried out by a secured creditor under Section 52 of the IBC.”

Another domain expert, Rachit Sharma, DGM, Taxmann, while throwing light on the new amendments, said that these amendments to IBC norms will be effective in restricting secured creditors from selling or transferring their assets of a company undergoing liquidation to anyone who is ineligible to submit an insolvency resolution plan.

He further clarified that these amendments are in line with the intent of Section 29A which was framed to prevent any sort of re-entry of ex-promoters at any point of resolution/liquidation process.

Thus, the ineligibility of a person is complete and he is now barred from being part of any compromise or arrangement at any stage of liquidation.

Furthermore, secured creditors who previously were free to sell their secured assets independently cannot do the same to a person who is ineligible under the IBC.

Giving a thumbs up to the amendments, another legal expert, L Viswanathan, Partner, Cyril Amarchand Mangaldas, said that the changes in the regulations “is in line with the objective of the IBC” to disallow disqualified persons from re-acquiring the company through the mechanism of a scheme or in enforcement of security interests by secured creditors.

Viswanathan goes on to say, “In fact, the amendment goes further to provide that such persons shall not be a party in any manner to such compromise or arrangement thereby even possibly disenfranchising such persons also from being eligible to vote as members on any scheme of compromise or arrangement.”

Mehul Bheda, Partner, Dhruva Advisors LLP is of the opinion that the newly introduced amendments are an effort to bring liquidation at par with the resolution process. The restrictions under Section 29A of the Code that was previously implemented only on the promoters are now equally applicable to liquidation.                                    

He explains, “This means that no promoter, who is barred from the resolution process, can make a backdoor entry by buying the assets of the company under liquidation or even participating in a scheme of arrangement under Section 230.”

Last Word

All changes and amendments brought to the Insolvency and Bankruptcy Code (IBC) 2016 are done with the ultimate aim of weeding out the discrepancy, plugging in the gaps and provides a robust insolvency law.

IBBI has done a commendable job by taking prompt note of all gaps and discrepancies and after extensive consultations have amended the regulation to strengthen the process of insolvency and bankruptcy of corporates.

Clarity on the provisions of 29A was the need of the hour and with these amendments, IBBI has ensured that ambiguities are not exploited and genuine stakeholders get a fair deal.

IBBI’s initiative to block ex-promoters of a company from acquiring assets in a clandestine manner in cases of insolvency and liquidation is a positive step towards streamlining the entire process. This will also help bring in transparency to the entire process!

-Shweta Gupta, (Founder and CEO, MUDS)

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December 2021