President Gives Assent To Insolvency And Bankruptcy Code

Let me begin at the very beginning by pointing out that the President Ram Nath Kovind has given his assent to the Ordinance approved by the Union Cabinet to amend the Insolvency and Bankruptcy Code (IBC), which is primarily aimed at strengthening the stressed asset resolution process. The Ordinance which is notified in the government gazette, spells out the norms on who cannot be a resolution applicant for companies undergoing corporate insolvency resolution process (CIRP) under the IBC. Thus we see that the Ordinance has been cleared for blacklisting those who cannot bid for stressed assets.

While craving for the exclusive indulgence of my esteemed readers, let me also inform them that while those who have been banned from bidding for companies being put out for resolution include willful defaulters, undischarged insolvent, persons convicted of an offence or disqualified as a director under the Company law, loan guarantor, persons banned from trading in securities market, and an account classified as NPA for more than one year and failing to pay overdue amount before submission of bids. It must be brought out here that in the ordinance that was cleared by the Union Cabinet on November 22, the government has not categorically banned existing promoters from bidding for their own companies undergoing resolution. However, the Finance Ministry officials said that checks and balances have been built in to keep a high quality bar for companies that will be allowed to takeover companies under resolution.

For my esteemed readers exclusive indulgence, let me also inform them that the Finance Ministry said in a statement that, 'The ordinance aims at putting in place safeguards to prevent unscrupulous, undesirable persons from misusing or vitiating the provisions of the Code, (and) to keep out such persons who have willfully 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.' There can be no denying that it is a right step in the right direction. It must be strictly and uniformly implemented.

Needless to say, SBI Chairman Rajnish Kumar said that, 'Valuation of the stressed assets facing insolvency proceedings is unlikely to be impacted with the Ordinance that debars promoters who have been tagged as willful defaulters from bidding for such assets'. Entities having their accounts classified as Non Performing Assets (NPA) for one year or more and are unable to settle their overdue amounts, including interest thereon and charges relating to the account before submission of the resolution plan, have been barred from participating in the bids. Very rightly so!

As it turned out, Manoj Kumar who is a partner and head of the advisory firm 'Corporate Professionals Capital Pvt Ltd', which is dealing with some insolvency cases under the IBC made it a point to mention explicitly that, 'This sets the bar quite high for existing promoters to bid for their own companies. In cases where account is NPA for over a year, the promoters will first have to make significant payment to the banks to be eligible for bidding. But in cases where NPA account is less than a year, existing promoters can clearly bid for their own companies.' It has to be borne in mind that over 300 cases have been admitted for resolution with various benches of the NCLT under the Code, including 12 large cases. Manoj said that in many of them, the NPA account is less than a year old, where existing promoters can put in bids.

We cannot lose sight of the glaring fact that another very significant change in the law that has been made by this Ordinance which has been cleared by the President is that the government has provided for a fine ranging from Rs 1 lakh to Rs 2 crore for violating rules. The new rules also put a lot of responsibility on the Committee of Creditors (CoC) overseeing the resolution process. We thus see that the CoC is liable to make sure that the resolution process is carried out strictly in accordance with the due procedure established by law.

What is of immense significance to note here is that it has also been specifically provided that the Committee of Creditors shall reject a resolution plan, which is submitted before the commencement of the ordinance but is yet to be approved, and where the resolution applicant is not eligible as per the new rules. In such cases, on account of the rejection, where there is no other plan available with the CoC, it may invite fresh resolution plans. A senior banker said on condition of anonymity that, 'These provisions will make the resolution process more transparent and much tougher at the same time. In some of the cases, the CoC may be required to re-invite resolution plans.'

It is also noteworthy that persons who have indulged in preferential transaction, undervalued transaction, fraudulent transactions or who have been disqualified by the government to be a director in a company have also been barred from being resolution applicants. These changes have been made through insertion of a new Section 29A in the IBC. The changes in the law also disallow sale of property to a person who is disqualified to be a resolution applicant.

It must be brought out here that the amendments stipulate that the CoC ensure the viability and feasibility of the resolution plan before approving it. Only after the viability and feasibility of the resolution plan is ensured by the CoC should it be approved. This will make sure that no glitches stand in the way of the resolution plan once it is formally approved.

It must also be brought out here that the Insolvency and Bankruptcy Board of India (IBBI) has also been vested with additional powers. This was considered imperative to ensure more compliance and check violation of rules. Of course, as per the Ordinance: 'The CoC may approve a resolution plan by a vote of not less than 75 percent of the voting share of financial creditors, after considering its feasibility and viability and other requirements specified by the IBBI.'

Be it noted, the government had just last year in 2016 had enacted the IBC and earlier this year in 2017 empowered the RBI to direct banks to initiate insolvency proceedings against large loan defaulters. Subsequently, banks initiated insolvency resolution against the 12 large NPA cases by referring these to the National Company Law Tribunal benches. These companies, including Jyoti Structures, Bhushan Steel, Monnet Ispat and Electrosteel Steels, Amtek Auto and Era Infra Engineering among others, account for a combined debt of around Rs 2.5 lakh crore.

Truth be told, in some of the 12 large cases, resolution plans have been submitted by related parties, and concerns have been raised on existing promoters wresting back control of companies under resolution at cheap valuation. Incidentally, in the first case for which a resolution plan was approved under the IBC, the Hyderabad branch of NCLT, approved the amalgamation of Synergies Dooray Automotive with a related company Synergies Castings. The resolution involved the lenders taking a haircut as high as 94 percent from the total claimed value of Rs 972.15 crore.

As things stand, Shardul Shroff who is executive chairman and national practice head of insolvency and bankruptcy of Shardul Amarchand Mangaldas & Co, said that, 'These amendments will save the Government the blushes in a situation where promoters of existing corporate debtors seeks massive haircuts in the guise of a resolution applicant in relation to a resolution plan. There is clear logic that those persons who have caused the insolvency or losses to the banking system cannot be beneficiary of the very asset that they have rendered non-performing at a reduced cost.' Any person connected to the entities/persons barred by the new law, are also not eligible to be resolution applicants. These include those who are promoters or in management of control of the resolution applicant or will be promoters or in management of control of corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associated company or related parties.

Having said this, it must be pointed out here that a senior member of the Committee on bankruptcy law and one of its architects has voiced his strong disapproval of the Ordinance that bars ousted promoters of an insolvent company from regaining control. According to MR Umarji who was a Member of the Government constituted Bankruptcy Law Reforms Committee and also a former Executive Director of the RBI: 'The Ordinance is obsessed with large borrowers, can adversely affect the fortunes of struggling small and mid-sized companies looking for a second chance, and can make defaulting companies vulnerable to predators'.

Truly speaking, Umarji who was also the key person behind the SARFAESI Act (that allows banks and financial institutions to auction properties to recover loans), said he hoped that the government would make necessary changes to overcome the shortcomings in the final Act. He said that, 'The insolvency issue and most discussions focus on big borrowers and large companies that would force banks to take deep haircut. But a large number of cases are small and medium scale companies where the promoter is inseparable from the entity. Here the promoter may be best suited to run the company and there may not be anyone else interested in such companies. More importantly, rescheduling such loans may not cost the bank too much. Can you really deny promoters of such companies the chance to revive the company…There will be bidders for a large steel or cement plant. But what about a insolvent textile unit in Tirupur or a chemical unit in Ankleshwar?'

Practically speaking, a crafty competitor may take advantage of the amendment to acquire or shut down a distressed competitor. Such a predator can resort to buying some loan or debt instruments and invoke the bankruptcy code to kill competition and gain market share while the promoter remains a mute spectator. Umarji rightly pointed out that, 'Consider a case where an entrepreneur ropes in other investors and funds most of the fixed assets with equity. Bank loans are only in the nature of working capital. There is no charge or mortgage created on fixed assets in favour of the banks. Now, if the company defaults due to some disruption in the manufacturing process, how can the undertaking be allowed to be taken over by a person proposing insolvency resolution without working out the Enterprise value and compensating shareholders?'

No prizes for guessing that the Ordinance indirectly implies that the company has to regularize its unpaid debts if the promoters wishes to step in to take over. Umarji is right in raising questions and in saying that, 'This is a peculiar provision. The default is the trigger for insolvency. Now, if the NPAs are cleared and the default is corrected, how does one continue with a resolution plan?' Unlike SARFAESI which can be invoked only after a loan account turns non-performing asset (or NPA after 90 days of default), the insolvency code can be moved soon after a default. The objective of the provision is to initiate resolution and take corrective measures as soon as possible. This should be done accordingly!

Now let us see the other side of the coin also. Debashis Basu in his enlightening editorial 'Bankruptcy ordinance: Motivated criticisms?' in Business Standard newspaper dated 27 November 2017 rightly points out that, 'If there are 100 bankruptcy cases to be resolved, in how many cases can the promoters reclaim their assets? If it's impossible to do this calculation, why jump to conclusions? Assuming that in 10 percent of cases the defaulting promoters are successful, why cry about an amendment that will not apply to 90 percent of the cases anyway? And if there was no amendment and in 50 percent of the cases the defaulting promoters emerged as successful bidders, wouldn't you say that the bankruptcy process has failed again? About Rs 10 lakh crore of bad assets have arisen mainly because of deep corruption and the nexus between bankers, businessmen and politicians. And our solution is to let the same bankers hand over the businesses to the same businessmen? What are we missing here? This is one decision of the government that is correct if it also dramatically increases the supply of bidders and removes the frictions in the resolution process. But that is a subject of another piece.'

No doubt, this Ordinance fixes one of the major problem afflicting the IBC and that is promoters legally regaining control over the companies which they had earlier mismanaged. In fact, Sajjan Jindal took to social media to make the government take steps to stop the 'dubious promoters' from bidding for their companies and his efforts bore fruits. Centre came out with an amended Section 29A of the IPC by which willful defaulters were ousted. Also, persons associated with non-performing assets for a year or more and who are unable to settle their amounts and those who have executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor undergoing a corporate insolvency resolution process are also disqualified.

All said and done, there is little doubt that with provisions that curb discredited investors, amended bankruptcy code will be able to deal with stressed assets in a much better manner. Willful defaulters would now be barred from bidding for companies that are put up for sale under it. Also, the Ordinance bars promoters whose firms are non-performing assets (NPAs) to banks for more than a year, from participating in the bidding process. We thus see that India's Insolvency and Banruptcy Code (IBC) now is armed not with just teeths meant to be showed but also which can strike hard! It is no small thing that the World Bank had recognized the significance of the IBC in October when it cited the IBC as a major reason for India improving its ranking in the Ease of Doing Business Index which has immensely enhanced India's reputation globally! It is also heartening to note that the IBBI has amended its regulations to make it incumbent on the Board's professionals to take into account the credibility and creditworthiness of bidder which includes promoters while laying out the turnaround plan of a defaulting company. Still before making it finally into a law, it is incumbent that Centre takes into board some of very serious concerns that have been voiced by some very experienced and eminent persons who has held many high positions like MR Umarji. It will make sure that all glaring loopholes are plugged before it is finally made into a law!