Insolvency Code Tweaked

The government sought to tighten the Insolvency and Bankruptcy Code through an ordinance to ensure that willful defaulters and promoters of companies in loan default over an extended period of time won’t be able to get their hands back on assets during the resolution process.

The ordinance comes in the wake of concerns that promoters who had defaulted on loans and caused banks to take deep haircuts were trying to regain control of their companies. The move is aimed at ensuring that such attempts at backdoor entry in the guise of resolution applicants are prevented.

This suggests that promoters of 11of the dozen big loan default cases referred by the Reserve Bank of India for resolution may not be able to bid for their companies during the resolution process.

The government has been worried about the political consequences of such an eventuality — promoters regaining control — as banks are forced to swallow loan losses.

The ordinance bars wilful defaulters, undischarged insolvents and disqualified directors, besides those who have engaged in preferential, undervalued or fraudulent transactions as determined by the adjudicating authority. This also includes those who are promoters, in the management or control of such persons whose accounts are classified as non-performing assets beyond a prescribed duration. It’s not clear what this duration would be.

The ordinance prescribes eligibility criteria for prospective resolution applicants and empowers the Insolvency and Bankruptcy Board of India to specify other norms if required. It also provides a due diligence framework to enable the committee of creditors to make a proper assessment of the creditworthiness and credibility of an applicant before approving a resolution plan.

As many as 400 companies have been referred to the National Company Law Tribunal for resolution.

The 12 big loan default cases referred by the Reserve Bank of India for resolution include Essar Steel, Bhushan Power, Bhushan Steel, Amtek Auto and Lanco Infratech. Resolution professionals in charge of the process have put these companies on the block. A case is taken up for resolution under the code only after receiving NCLT approval.

Wilful defaulters are those who have deliberately avoided repayment of loans despite having the capacity to do so, have diverted funds for other purposes or siphoned off money.

IBBI had earlier amended regulations governing the corporate insolvency resolution process to ensure that — as part of due diligence prior to approval of a resolution plan — antecedents, creditworthiness and credibility of a resolution applicant, including promoters, are taken into account by the committee of creditors.

However, an amendment to the code was needed as curbs on promoters bidding would not have held up in courts otherwise.

The corporate affairs ministry has already set up a 14-member Insolvency Law Committee headed by corporate affairs secretary Injeti Srinivas to take stock of the code’s implementation.

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