Bankruptcy resolutions expected to soar after Budget spells relief for RPs
3 min read . Updated: 03 Feb 2023, 07:43 PM IST
Premium- The move will aid liquidators to abide by only one insolvency law without the fear of complying with two laws – Income Tax Act and Insolvency & Bankruptcy Code (IBC)
Liquidators in India, who are entrusted with winding up bankrupt companies, will no longer be prosecuted for failing to comply with income tax (IT) regulations. They will only have to meet provisions under the insolvency law, since the government has decriminalized liquidators from meeting select provisions under the IT Act.
The move could provide a leg up for resolutions of liquidation cases under the Insolvency and Bankruptcy Code (IBC).
The Union Budget 2023 has decriminalized section 276A of the Income Tax Act which enabled criminal prosecution of a liquidator for failing to give notice of his/her appointment within 30 days or set aside amount or part with assets without notifying an officer.
The move will aid liquidators to abide by only one insolvency law without the fear of complying with two laws – Income Tax Act and Insolvency & Bankruptcy Code (IBC). This will ensure smoother outcomes of resolutions under the IBC process, which has moved at a snail’s pace since its implementation in December 2016, experts say.
“This will reduce the burden of legal compliances on the liquidators and they can perform their functions without any baggage and biases," Ashish Pyasi, associate partner, Dhir and Dhir Associates.
On Wednesday, the Budget proposed that no fresh prosecution shall be launched against a liquidator who fails to give notice or set aside the amount as required under the IBC law sub-section(1) of section 178 after 1 April, 2023.
Including this, during the Budget speech, finance minister Nirmala Sitharaman announced reduction 39,000 compliances and decriminalized over 3,400 other provisions.
The Budget documents said it has been the stated policy of the Government “to decriminalize minor offences as a step towards improving ease of business".
“It’s a welcome move to delink both the sections (section 178 and 276A) from the liquidation process under IBC. As such this legacy had to be carried by an Insolvency Professional acting as the liquidator, who is neither promoter nor management of the Company, and liable for past acts of the Company, said Sutanu Sinha, Partner with the Business Restructuring practice at BDO India, who also acts as insolvency professional in cases under IBC.
Section 276A also imposes personal liability on liquidators for non-compliance.
According to Pyasi, the income tax law’s provisions requiring to keep aside an amount was leading to conflict with the Insolvency and Bankruptcy Code (IBC) because of the nature of its claims and settlements. Therefore, compliance was difficult and non-compliance with the same would attract prosecution which would have attracted imprisonment up to two years.
“The provisions were made when the government dues (among the claims under IBC) were in priority. However, now IBC provides for a waterfall mechanism wherein it provides for which dues (including tax) will be paid. Therefore, to decriminalise these provisions became a necessity. If not decriminalised then it will lead to prosecution of the liquidator for something which is not even required to be complied with," Pyasi added.
A waterfall mechanism provides for distribution from sale of liquidation on priority basis with secured creditors in the top tier as the first to receive the settlement amount. This is followed by other dues including government and tax liabilities, workmen or employees and unsecured creditors.
While there are not many cases of liquidator being prosecuted, the law was a hindrance for them to conclude a sale under liquidation thereby slowing down the overall resolution process.
Around 46% of the almost 4,000 closed insolvency cases have ended in liquidation and only 14% resulted in the approval of resolution plans, showed the quarterly data released by the Insolvency and Bankruptcy Board of India.
Of the total 5,889 cases under bankruptcy till September 2022, 1,807 were dragged into liquidation and 1,378 are ongoing liquidation processes, the data showed.
