The Centre’s ordinance to prevent promoters – who are wilful defaulters – from bidding for their own stressed assets has been wholeheartedly welcomed by experts. Experts remarked that the ordinance, which received the President’s assent on Thursday, is expected to protect the insolvency resolution process from being debauched.
Sumit Agarwal, founder of Suvan Law Advisors and an ex-SEBI official said, “IBC Ordinance is intended to prevent wilful defaulters from bidding for stressed assets. The idea is to prohibit certain persons from submitting the resolution plan who may adversely impact the credibility of insolvency resolution process because of their antecedents. These antecedents include an undischarged insolvent or a wilful defaulter, a convict, disqualified director and SEBI debarred persons among others. Further, the amendment includes certain thresholds such as 75 per cent voting approval of financial creditors, before the amendment it was approved by a committee of creditors. The Ordinance aims to protect the resolution process from any contamination.”
Meanwhile, legal eagles observed that the move was in the interest of stakeholders. Yogesh Chande, partner of Mumbai-based law firm, Shardul Amarchand Mangaldas said, “Dubious promoters should realise that somewhere in their journey of entrepreneurship, at the right place and at the right time if the situation warrants, they should stop chasing the business, instead of clinging on to the emotional attachment. The amendment is a welcome move and is in the interest of various stakeholders.”
Top 12 Insolvency Cases
The Reserve Bank of India on June 13, 2017 had asked banks to invoke insolvency proceedings against the top 12 defaulters by filing cases in the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code. The top 12 defaulters constituted about Rs 2 lakh crore or 25 per cent of the bad loans in the banking system (gross NPAs).
Under this code, 180 days are provided for insolvency resolution and 90 days for appeal – against the decision by the aggrieved party, if any – taking the resolution process time to a maximum of 270 days.
The bankruptcy code seeks to give teeth to the lenders, who have not been able to recover money from the defaulters despite being given several schemes to recover debt by the Reserve Bank of India, such as corporate debt restructuring, strategic debt restructuring, use of joint lender’s forum, 5/25 mechanism and scheme for sustainable structuring of stressed assets also called S4A.
Experts felt that promoters could have obtained undue advantage if the amendment had not come about.
Vikram Babbar, partner at Fraud Investigation & Dispute Services of EY India said, “The current situation on bad loan crisis and higher proportion of wilful default cases especially among large corporates, has warranted the restriction as imposed by the amendment. This is imperative in weeding out the undue advantage promoters would have otherwise got and aid effective implementation of the IBC.”
At the same time, a few others opined that the promoters had already been provided ample opportunities to revive the business and did not deserve another chance.
“The amendment seeks to give an opportunity for the deal (sale of the stressed asset) to fructify.” Having been given multiple opportunities through the life of the asset that has turned stressed and failed, why should yet another opportunity be given to the promoter? When the promoters did not have the money to fund earlier attempts of restructuring, how did the money crop up suddenly?” summed up Arun Kejriwal Founder, KRIS Research.
The issue of loan defaults is one of the most contentious problems, the present government has been facing. Whether the new amendment will succeed in its proposed goals or will it end up on the long list of measures the government had taken to address the issue of loan defaults, is something which only time can reveal.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily represent the views of the publication.