The Cabinet has approved a
promulgation of an ordinance to amend the 16-month-old Insolvency and
Bankruptcy Code (IBC).
The present amendment is based on
recommendations of a 14-member government appointed committee that had last
month suggested a slew of measures, including addressing difficulties of home
buyers and making recoveries easier for lenders plus disqualifying certain
classes of promoters from back door entry into the resolution process.
On 26th March 2018,
the Insolvency Law Committee submitted a report addressing various pressing
issues in relation to the Code. One of the key recommendations of this report
was to streamline the application of section 29A in order to prohibit only
those who have contributed to the defaults and have consequently run the
company a ground, or are otherwise undesirable, from participating in the
insolvency resolution process.
The recommendations in relation
to this section include the deletion of “if such person, or any other person
acting jointly or in concert with such person” from the first line of the
provision. This aims at preventing the interpretation of the phrase “person
acting jointly or in concert” in accordance with the definition provided in the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This
is a commendable step as such an interpretation was proving to be counter
productive owing to the wide range of individuals who stood disqualified from
the resolution process due to wide-ranging scope of the definition.
Other positive recommendations
include the exclusion of pure play financial entities from the ambit of clause
(c) of section 29A, as the Committee rightly observed that it is highly
probable for them to be related to companies that are categorised as
non-performing assets (NPA). Another pragmatic suggestion in relation to this
clause is the addition of a proviso stating that the section will not apply if
the NPA is held solely due to the acquisition of a corporate debtor under the
process prescribed by the Code for a period of three years from the date of
approval of the previous resolution.
Further, the suggestions to
narrow down clause (d), which relates to conviction for offences punishable
with imprisonment of two years or more and clause (e), which deals with
disqualification to act as director under the Companies Act 2013, are indeed
laudable steps towards a more progressive application and implementation of
this section. The Committee observed that these two clauses are personal in
nature and need not be extended to the related parties of the resolution
applicant. Moreover, clause (d) might further be narrowed down by incorporating
a schedule of offences to exclude those offences which have absolutely no
connection with the ability of an applicant to successfully manage a corporate
debtor. Lastly, the ambit of this clause may also be tapered down if the
Government agrees to the suggestion that it will not be applicable if an appeal
has been preferred against the concerned order within the prescribed statutory
period.
Clause (g) of the section also
has been constricted in its application. This provides the necessary safeguard
for applicants who have acquired corporate debtors, who have previously engaged
in a preferential, undervalue, fraudulent or extortionate credit transaction.
Furthermore, the Committee has provided for the necessary change in phrasing of
clause (f) in order to ensure it is in consonance with the decision of the
NCLT.
However, while addressing the
issue of compliance with section 29A being too onerous and self-defeating as it
prolonged the resolution process indefinitely, the Committee merely stated that
applicants would be required to submit an affidavit confirming their
eligibility under this provision. Additionally, the committee was of the opinion that the presence of
section 30(2)(e) which mandates the resolution plan to be in consonance with
the law, would ensure compliance with section 29A. Lastly, it clarified that
this section would be prospective in its application to prevent any sort of
hindrances in cases, which are already at an advanced stage.
Classification of Debt:
Advantage to Home buyers
Home buyers had so far been
treated as "unsecured creditors" which means they do not have the
first charge on the assets of the bankrupt firm. The President has given his
assent to the Ordinance. This proposal classifies home buyers as ‘Financial
Creditors’ at par with lenders to help them quickly get refunds from defaulting
companies/developers.
Now by amending the provisions
and By treating them as financial creditors, they will now move up the priority
list of creditors, substantially raising the prospects for clawing back a part
of their investment.
Earlier, if a realty firm went
bankrupt, the units for which home buyers had paid money would become the
property of banks which could auction them without bothering about the dues of
the home buyer. The Ordinance creates a favorable situation for home buyers.
Home buyers who have been left high and dry by unscrupulous promoters of
bankrupt realty companies will enjoy the rights and privileges of financial
creditors under the Insolvency and Bankruptcy Code (IBC).
Impact
The invocation of section 29A not
only significantly influences the procedure of resolution but also engenders a
material economic impact. The procedure has become more complex as the
resolution professional or the liquidator is given the additional
responsibility to determine the eligibility of the applicants. Moreover, this
obligation to determine the eligibility of an applicant also dampens the
prospect of completing the resolution process within the prescribed time period
of 180 (or 270) days.
In addition to the procedural
obstacles, it is imperative to note that the disqualifications enshrined in
this section have the potential to hinder several innocent applicants who may
be deemed ineligible due to mere technicalities and trivialities. The
diminution in the number of applicants inhibits the necessary competition in
the bidding process, which in turn pares down the ultimate financial value of
the resolution plan. Moreover, the ambit of the section is so wide that
ineligibilities have become common, making liquidation not merely a possibility
but also a probability. Liquidation must be avoided at all costs as it is not
only detrimental to the creditors, compelling them to take inordinate haircuts,
but also obliterates the organisation capital of firms. This negatively impacts
both corporate sentiments and jobs, affecting the growth of the economy. Thus,
it is evident that the consequence of this section extends way beyond what it
originally intended to accomplish.
The way forward
Even though prospective
application is both desirable and creditable, the Committee has so far been not
able to address the larger question of how it seeks to increase the inclusion
of promoters, minimise the adverse economic impact caused by inordinate delays,
restrict the involvement of the adjudicating authorities and prevent
unnecessary risks posed by frivolous litigation. The submission of an affidavit
confirming eligibility is not viable as competing parties can always unearth
some minor technicality disqualifying their competitor by virtue of the sheer
dimensions of the section.
More importantly, the Government
needs to answer the question of the conundrum created by the legal
interpretation in the Bhushan Steel case that litigations are not to be
included within the time frame of 270 days established by the Code. This
defeats the very purpose of having a deadline for the resolution process and
must be addressed in the subsequent Amendment Act, if not in the Ordinance.
Moreover, to differentiate
between innocent and unscrupulous promoters, a body like the pre-pack pool in
the United Kingdom could be established. This would essentially entail the
establishment of a body of experienced business persons appointed by the
Insolvency and Bankruptcy Board of India who could independently review
promoters or connected party purchases. Promoter inclusion is also imperative
because their complete exclusion dissuades them from cooperating with the
resolution professional who requires relevant information from them to invite
bidders. Lastly, exclusion is dangerous by virtue of the possibility of the
promoter.
indulging in asset stripping and
other high-risk behaviour if the company is undergoing recurring losses and is
on the brink of insolvency. Thus, promoters who have not indulged in any
malfeasance must be given the opportunity to bid for their own companies.
We believe, section 29A has till
date created more problems than it has solved. Instead of barring defaulting
promoters, it has created a gateway to obstruct any resolution process by way
of litigation. While the procedural and economic impact may be beyond the
control of the Government, the need to streamline the application of this
provision is imminent. Therefore, as the Code is on the verge of being
overhauled, it is incumbent on the Government to incorporate the necessary
modifications to transform the fledgling insolvency regime in India into a more
advanced legal mechanism.
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Acquisory News Chronicle-May 2018