An ordinance on Insolvency and Bankruptcy code, 2016 was issued on November 23, 2017. The ordinance was brought in to rectify certain deficiencies in the code. Major deficiency of Insolvency and Bankruptcy code 2016 was the backdoor entry of crony capitalist promoters. These promoters were trying to bid for stressed assets with ridiculous low bids and also removing debt liability in the process.
The ordinance was promulgated to rectify the above issues. There are many changes that were brought by the ordinance in the IBC code and they are explained below.
1. IBC 2016 defines resolution applicant as a person who submits a resolution plan to an insolvency professional. A resolution plan specifies the details of how the debt of a defaulting debtor can be restructured. The Ordinance amends this provision to define a resolution applicant as a person who submits a resolution plan after receiving an invite by the insolvency professional to do so.
2. The Code specifies that an insolvency professional will take control of the defaulting company, and invite applicants to submit resolution plans. The Ordinance amends this provision to state that a resolution professional will only invite those resolution applicants to submit a plan, who fulfill certain criteria laid down by him (approved by the committee of creditors) or by the Insolvency and Bankruptcy Board.
3. The ordinance has changed the eligibility of the resolution candidate. A person will be ineligible to submit a plan if: (a) he is an undischarged insolvent (individual unable to repay his debt), (b) he is a wilful defaulter identified by the Reserve Bank of India, (c) his account has been identified as a non-performing asset for more than a year, (d) he has been convicted of an offence punishable with two or more years of imprisonment, (e) he has been disqualified as a director under the Companies Act, 2013, (f) he has been prohibited from trading in securities, (g) he has indulged in undervalued or fraudulent transactions, (viii) he has executed an enforceable guarantee in favor of a person who is a creditor to a defaulter undergoing a resolution process, (ix) he is connected to any such person mentioned above (including promoters or people in control of the defaulting firm during the implementation of the resolution plan), or (x) he has indulged in any of these activities outside India.
4. The code specifies that 75% of the creditors need to be present in a meeting to approve resolution plan. The ordinance amends this section to include the language that such resolution plan would have to include any set conditions from IBBI board. Furthermore, such a resolution plan cant be given to an illegible person as defined in the previous section for eligibility of person for resolution.
5. The code allows the insolvency professional to sell the moveable or immovable property of the debtor in case of liquidation. The Ordinance prohibits the insolvency professional to sell this property to any person who is ineligible to be a resolution applicant. Thus promoter who has been involved in stressed assets or declared as a willful defaulter will not be able to buy such assets or insolvency professional can’t sell these assets to such promoters. The ordinance also adds a section of penalties that declares any person contravening provisions of the Code for which no penalty has been specified will be punishable with a fine ranging between one lakh rupees to two crore rupees.
The amendments on face value don’t look too serious, and the intention of the amendments is to rectify certain deficiencies in the code. But, these changes have also brought certain scenarios that would be disadvantageous to the resolution process.
1. IBC 2016 was brought in to recover NPA from accounts that went bad. There are many reasons that these accounts went bad; primarily, due to worsening world economy and the global meltdown in 2008. Steel industries faced the double whammy of Chinese imports and general slowdown in the world demand for steel. Furthermore, UPA government’s policies had created paralysis in the Indian economy till 2013.
It would be wrong to blame the promoters for the problems that are beyond their control. While crony Vijay Mallyas’ are among the minority of the promoters, vast majority of promoters are genuinely creating shareholder wealth. Furthermore, promoters are well aware of the inner working of the companies that need restructuring. Therefore, it would be harsh to keep them out of resolution process. Willful defaulters need to be kept out of the resolution process and putting all promoters in the same bucket is a bad move.
2. Resolution plan needs to be independent from outside influences. IBBI rules would create an additional regulatory layer that would imperil the fast track nature of the process.
3. Hedge Funds are controversial entities throughout the world, and ordinance would bar them if they have investments in a previous NPA account. Worldwide hedge funds are an important source of funding and removing them could complicate the process of recapitalizing of NPA companies. The Hedge funds are known to take huge risks in their investment strategies and they often have some NPA on their portfolio. The ordinance would be disallow such entities to bid for NPA.
IBC 2016 is a good process and needs to be adjusted to get better results. But, populist measures would create hindrances in the operation of the code and recovery of NPA would be hurt.
Sources: Ordinance Text
About the author
Nagraj Subramanian got his Bachelor of Science with double major in Economics/Political Science from Kansas State University, USA. He got his L.L.B from Faculty of Law, Delhi University. Recently, he passed IBBI( Limited Insolvency Examination) .
He specializes Bankruptcy Law/International taxation/Commercial Law. He can be reached at [email protected]