New Delhi: President Ram Nath Kovind on Wednesday promulgated an ordinance amending the bankruptcy code, giving homebuyers the status of financial creditors, allowing owners of failed small businesses to win back their companies out of bankruptcy and lowering the votes needed for lenders to clear a corporate turnaround plan.
The amendments, which are based on the recommendations of an expert panel, mark an important milestone in the evolution of the insolvency and bankruptcy code (IBC) of 2016.
Under persuasion from the Reserve Bank of India (RBI), lenders have used provisions in the code to take large corporate defaulters to bankruptcy tribunals as the government seeks to address the Rs10 trillion toxic assets in the banking system that have dented banks’ ability to finance new projects and drive economic growth.
Injeti Srinivas, secretary at the ministry of corporate affairs (MCA), said that the amendments will help increase competition among potential investors for bankrupt assets. The government has been trying to ensure that corporate rescue plans are approved within 180 days, although the law allows a maximum of 270 days before letting unviable firms go into liquidation.
Srinivas added that road shows may be held in India and abroad for attracting investors to turn around bankrupt companies. As per the amendment, pure-play financial institutions such as asset reconstruction companies, alternative investment funds, foreign institutional investors and venture capital funds which may be related to companies classified as non-performing assets (NPAs) will not be barred from bidding for a bankrupt firm.
Implementation of the code—which provides for displacing errant management and promoters where needed—has triggered fierce court battles. Many creditors have also used the code, which is aimed to turn around insolvent firms, as a tool to recover dues by dragging debtor firms to tribunals. The latest changes try to address some of the implementation issues as well as balance the rights of lenders, businesses, employees and operational creditors.
An MCA statement said that recognizing homebuyers as financial creditors will give them “significant relief" as it will give them representation on the panel of creditors and make them an integral part of decision-making. In case of delays in delivery of homes, homebuyers will be able to drag the developer to a bankruptcy tribunal under the new provisions.
The amended code does not disqualify the owner of a small business from buying the company out of bankruptcy, unless the promoter is a wilful defaulter or is disqualified for reasons other than the default.
The amended code has lowered the voting requirement for major decisions such as clearing resolution plans from 75% to 66% and to 51% for routine decisions. This is meant to improve the ease of taking decisions, both regarding the future of the company as well as day-to-day operations. This may help some firms to be turned around rather than being liquidated.