Latest news and proposed changes to The Insolvency and Bankruptcy Code, 2016

The Union Cabinet has cleared the ordinance for making changes to the Insolvency and Bankruptcy Code (“IBC”).

The Ministry of Corporate Affairs (“MCA”) has set up a fourteen (14) member panel, Insolvency Law Committee, headed by Corporate Affairs Secretary, Injeti Srinivas, to identify issues and suggest ways for due implementation of the law.

It is proposed that the ordinance for amending the IBC will be presented in the winter session of Parliament and will be tabled for approval within six (6) months.

The exact nature of the amendment and its scope will be known only after the text of the ordinance is available after the president gives his assent.

IBC was passed by Parliament last year and became operational from December, 2016. It provides for a market-determined and time-bound insolvency resolution process, implemented by MCA. However, a set of concerns had emerged regarding promoters who are willful defaulters in loan default over an extended period of time or have a history of fraud, from buying the assets of the company for cheap during the resolution process. These willful defaulters are those who may have diverted funds for other purposes or siphoned off the money and deliberately avoided repayment of loans despite having the resources to do so.

IBC currently, does not specify the kind of buyers who can bid for stressed assets of companies that are undergoing bankruptcy proceedings. As a result, promoters who had defaulted on loans have access to reacquire their companies at a discounted price, pursuant to lenders deciding to let go a part of the money they are owed, and banks which are forced to swallow loan losses. An amendment focusing on this will ensure that such attempts of backdoor entry in the guise of resolution applicants will be intercepted.

It is estimated that approximately 3,500 cases have been filed for insolvency, out of which around 300 have been admitted to National Company Law Tribunal (“NCLT”), the arbitration authority for cases filed under IBC.

The first batch of twelve (12) large defaulters, referred by the Reserve Bank of India (“RBI”) in June, constitute a fourth of the total Non-Performing Assets (“NPAs”) that the banks have been tackling. This could signify that the promoters of these twelve (12) big loan default cases currently under the scrutiny of RBI for resolution, may not be able to bid for their company’s assets during the resolution process. Presently, these companies have been put on hold by the Resolution Professionals, and a case is only put forward once it receives the approval of the NCLT.

As determined by the adjudicating authority, the proposed ordinance will bar willful defaulters, undischarged insolvents and disqualified directors, besides those who have engaged in preferential, undervalued or fraudulent transactions. This will also include promoters who control or are a part of the management of such persons’ accounts which are classified as NPAs, beyond a particular time period.

The ordinance will provide a robust due diligence framework to aid the Committee of Creditors to assess the credibility of the applicant and then approve a resolution plan. It further shall prescribe an eligibility criteria for prospective resolution applicants, on the basis of the size of their business, and will hand over the power to the Insolvency and Bankruptcy Board of India (“IBBI”) to specify other norms if required. IBBI had earlier amended regulations governing the corporate insolvency resolution process to ensure that creditworthiness and credibility of a resolution applicant, including promoters, are taken into account by the Committee of Creditors, as part of due diligence prior to approval of a resolution plan. However, an amendment to the code was needed as curbs on promoters bidding would not have held up in courts otherwise.

Apart from this, certain matters regarding tax efficiency and compliances which stands crucial to the due processes, may also require reconditioning.

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