New Delhi/Mumbai: President Ram Nath Kovind gave his assent to an ordinance amending the Insolvency and Bankruptcy Code (IBC) on Thursday, barring errant promoters of defaulting companies from regaining control of their assets being sold under the bankruptcy process.
While experts welcomed the move as sending a strong signal against crony capitalism, some expressed concern that such stringent criteria for potential investors could reduce the number of revival proposals that may come up.
The IBC ordinance bars not only wilful defaulters, but also several other categories such as guarantors to the debtor, those with loans classified as non-performing assets (NPAs) for at least a year, those convicted for any offence with a prison term of more than two years, directors in companies that are disqualified, entities barred by the capital markets regulator, those who have been found to have struck fraudulent transactions with the firm, and connected entities.
“This is a watershed moment. These promoters have led the company to a situation where it has become insolvent and caused the loss of income to the banking system. It is sufficient grounds to disqualify them," said Shardul Shroff, executive chairman of law firm Shardul Amarchand Mangaldas.
The change in law comes at a time when 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. In some cases, such as that of Essar Steel Ltd, the promoters have also presented resolution plans. Another 29 firms identified by RBI are headed for the bankruptcy court if lenders cannot resolve their cases by 13 December.
“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," said a statement from the ministry of corporate affairs.
The amendments also stipulate that the panel of lenders which evaluates a turnaround plan assess the “feasibility and viability" of such schemes.
Some experts expressed concern that amendments will disrupt nearly all pending insolvency proceedings as the eligibility of all bidders will have to be ascertained before examining their bids. There is also the concern that if the classification of a debtor as a wilful defaulter is challenged in court, it could complicate the insolvency resolution process.
“The amendments are unduly harsh to bona fide defaulters and guarantors," said Sumant Batra, managing partner at law firm Kesar Dass B and Associates.
Experts said that promoters will challenge the amendment in the courts, arguing that it is retrospective in nature and unfair to those whose accounts turned sour owing to extraneous factors. “A blanket ban barring promoters form bidding is ethically incorrect. NPAs could be due to multiple reasons. We expect this to be challenged by promoters in court," said Abizer Diwanji, partner and national leader (financial services) at EY.
To be sure, promoters still have a way out by making good their overdue payments before bidding for these assets. However, this “will be difficult to implement in practice and would result in barring all promoters from proposing a resolution plan", said M.R. Umarji, who was a member of the Bankruptcy Law Reforms Committee that drafted the new law.
Concerns around fewer bids from potential buyers were brushed aside by Rajnish Kumar, chairman of State Bank of India. “If you look at the expression of interest of those companies which are now with NCLT (National Company Law Tribunal), there is a good interest. This is being driven by two things—what is the outlook for that industry and second is quality of the asset," said Kumar.
The amendments also distinguish individuals and those who run small proprietorships into two categories so that a small individual businessman or trader can file for bankruptcy resolution for one of his businesses without himself undergoing personal insolvency proceedings.
“There could be a case where only one of the proprietorship firms of an Individual would be admitted in insolvency leaving the other proprietorship firms of the same person," said Manoj Kumar, partner and head (M&A and transactions) at law firm Corporate Professionals.
Malvika Joshi in Mumbai contributed to this story.