Govt moves amendments to plug loopholes in insolvency law

Govt moves amendments to plug loopholes in insolvency law

The Insolvency and Bankruptcy Code (Amendment) Bill 2017 allows defaulting promoters to be part of the debt resolution process, provided they repay dues in a month




The government on Thursday moved amendments to the Insolvency and Bankruptcy Code (IBC), seeking to streamline the law and plug loopholes.The Insolvency and Bankruptcy Code (Amendment) Bill 2017, introduced by finance minister Arun Jaitley in the Lok Sabha, allows defaulting promoters to be part of the debt resolution process, provided they repay dues in a month.

This will aid promoters who had submitted resolution plans before the enactment of an ordinance that barred them from taking part in the resolution process of the companies.Further, it has paved the way for asset reconstruction companies, alternative investment funds (AIFs) such as private equity funds and banks to participate in the bidding process.

Many of these entities acquire distressed assets and the classification of these assets as non-performing assets (NPAs) would have disqualified them from the bidding process.Similarly, banks opting to convert their debt into equity under the Reserve Bank of India’s scheme for sustainable structuring of stressed assets would have inadvertently become promoters of these insolvent companies and thereby been barred from the resolution process.




The amendments aim to correct these anomalies.They seek to strike a fine balance in the trade-off between punishing wilful defaulters and ensuring a more effective insolvency process.The bill has also sought to bring any individual who was in control of the NPA under the ambit of the insolvency code. It lays out that the individual insolvency law will be implemented in phases. It also allows guarantors of insolvent firms to bid for other firms under the insolvency process

The bill replaces an ordinance that was brought in last month. The ordinance sought to bar wilful defaulters, defaulters whose dues had been classified as NPAs for more than a year and all related entities of these firms from participating in the resolution process.

The amendment bill has addressed concerns about some of the stringent provisions in the ordinance that investors felt could have made the resolution process a non-starter. Analysts say the dilution of the clauses may not be enough for an effective resolution process.

“The bill dashes hopes of all bonafide promoters who were expecting to be ring-fenced and brands all acts of default as malfeasance,” said Sumant Batra, an insolvency expert, adding that the insolvency code was envisaged as a resolution tool rather than a loan-recovery tool.

He added that the law does not recognize promoters who may be facing genuine operational or financial difficulties because of external factors such as policy decisions.

The IBC was enacted in 2016 to find a time-bound resolution for ailing and sick firms, either through closure or revival, while protecting the interests of creditors. A successful completion of the resolution process was expected to aid in reducing rising bad loans in the banking system.

As of end-September, NPAs in the Indian banking system made up around 9.85% of total advances, according to Care Ratings.The position of promoters has largely remained unchanged except for certain clarifications offered by the amendment bill, said Sapan Gupta, national practice head, banking and finance, at law firm Shardul Amarchand Mangaldas.

“They continue to remain ineligible as was the position in ordinance. AIFs will be exempted from the qualification criteria but in general the size of AIFs is not big enough to make any meaningful contribution to the availability of funds. However, it does provide them a window of opportunity to scale up,” he said.

The Mint, New Delhi, 29th December 2017

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