Changes in the Bankruptcy Code - will this work ?
Bhumesh Verma 7 Dec 2017

Changes in the Bankruptcy Code - will this work ?

Recognising the urgency warranted by facts on ground, the Government of India has come up with an Ordinance to amend the Insolvency and Bankruptcy Code (IBC) on Thursday, barring inter alia, promoters of defaulting companies from regaining control of their assets being sold under the bankruptcy process.

I have ambivalent feelings about the rationale and success prospects of the move.

Some experts are welcoming the move and some are expressing concern about the efficacy of the action. On one hand, the amendments may be construed as a signal against crony capitalism, the move may backfire as well and reduce the number of revival proposals that may come up.

The ordinance not only prohibits only wilful defaulters, but also several other categories of persons / entities. For example:

(i)  Guarantors to the debtor,

(ii) Those with loans classified as non-performing assets (NPAs) for at least a year,

(iii) Those convicted for any offence with a prison term of more than two years,

(iv) directors in companies that are disqualified,

(v) Entities barred by the capital markets regulator,

(vi) Those who have been found to have struck fraudulent transactions with the entity in question, and connected entities.

The amendments also stipulate that the panel of lenders which evaluates a turnaround plan assess the “feasibility and viability” of such schemes.

Currently, 11 out of the 12 cases chosen by the Reserve Bank of India (RBI) for early bankruptcy proceedings are in advanced stages of auctioning assets.

Further, December 13, 2017 is the deadline for another 29 companies identified by RBI to face the bankruptcy court if there is no resolution.

In some of these cases, the promoters have also presented resolution plans. These are the same people who have brought their companies to this stage of financial bankruptcy, cause huge loss to Indian banking industry and now they wish to wrest control again. Handing back the keys of bankrupt companies to same set of people could be suicidal and counterproductive to the whole resolution mechanism.

This was an area of major concern for banks, investors and the government for last couple of weeks.  The erring promoters have been first trying to stall the IBC proceedings on one ground on the other. Now that these proceedings are moving, they wish to take control of their entities by a backdoor entry.

As per the Ministry of Corporate Affairs release, “The amendments aim to keep out such persons who have wilfully defaulted, are associated with non-performing assets or are habitually non-compliant and, therefore, are likely to be a risk to successful resolution of insolvency of a company.”

Due to the ordinance, the eligibility of all bidders will have to be ascertained very minutely before examining their bids. There could also be challenge to classification of a debtor. It is expected that many promoters may challenge the bona fide of the Ordinance.

As it happens, some bad apples rot the entire system and create problems for genuine business people. Not all promoters would be wilful defaulters or cheats – there could certainly be some genuine cases of business failure.

Somehow, the reasons behind the Ordinance may have a political colour too. It has become fashionable to paint all promoters in black.

Time only will tell !

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