Bankruptcy amendment bill gets Parliament nod
NEW DELHI: The Parliament on Tuesday gave its nod to amendments to the insolvency and bankruptcy code that aims to keep defaulting promoters out of the resolution process of insolvent companies.
The Insolvency and Bankruptcy Code (Amendment) Bill 2017 was passed by Rajya Sabha amid concerns that the changes could bar genuine domestic investors from the insolvency resolution process, adversely affect micro, small and medium enterprises (MSMES) and lead to large scale litigation.
The bill, which replaces an ordinance, was passed by the Lok Sabha last week. The amendments will be notified after the President gives his assent.
Responding to the debate, finance minister Arun Jaitley said insolvency is a relatively new area in India and there could be further corrections in laws and rules depending on the experience of the resolution process.
“I hope we do not come back to the house very frequently,” he said.
Jaitley expressed hope of a successful resolution process at least for those companies that are asset-backed.
The finance minister also assured that the government is committed to protecting the interests of MSMES.
“The insolvency legal committee is already looking into the suggestions if you need a separate framework for MSMES. It will submit its report in three months,” Jaitley said.
The ordinance sought to bar wilful defaulters, defaulters whose dues had been classified as non-performing assets (NPAS) for more than a year, and all related entities of these firms from participating in the resolution process.
The bill, however, allows defaulting promoters to be part of the debt resolution process, provided they repay dues in a month to make their loan account operational and the resolution happens within the overall time frame specified in the code.
This will help promoters who had submitted resolution plans before the ordinance barred them from taking part in the resolution process of companies.
The bill also allows 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 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 Insolvency and Bankruptcy Code 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.
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.
Speaking i n the debate, former finance minister P. Chidambaram pointed out that the changes to the law may keep out a large number of domestic investors. MUMBAI: The Insolvency & Bankruptcy Board of India (IBBI) has done away with the requirement for disclosing the liquidation value of an asset undergoing resolution—a move that is expected to help better price discovery for stressed assets under the bankruptcy framework.
IBBI amended its regulations on December 31 and the changes took effect from Monday. The regulator also said that a resolution plan needs to identify the specific sources of funds that will be used to pay the liquidation value to creditors who don’t agree to the plan. “Since the liquidation value was previously included in the information memorandum, prospective bidders who had access to the same were providing bids which were closer to the liquidation value rather than a value (based) on a going concern basis. This amendment was necessary and will help in optimal price discovery for assets and reduce haircuts for lenders,” said Aashit Shah, a partner at law firm J Sagar Associates.
The information memorandum is a document prepared by the resolution professional giving bidders access to information such as the financial position of the debtor and disputes the debtor is involved in.
Sumit Binani, a resolu- tion professional, said investors or buyers had been using liquidation value as the guiding price while submitting bids.
“In most cases, bids were close to the liquidation value. This move is positive. In cases where information memorandum is already shared, this amendment may not alter anything as far as values are concerned. But it is definitely positive for cases from here on,” he said. Lenders are in the middle of finalising resolution plans for 11 of the 12 accounts that were referred to the National Company Law Tribunal for early insolvency proceedings following the Reserve Bank of India’s directive in June.
The central bank followed this with a second list of 28 accounts, accounting for ₹2 lakh crore in bad loans, in late August. Here, the lenders were mandated to firm up a resolution plan by December 13, failing which they were forced to take these defaulters to the NCLT.
The interim resolution professional (IRP) will still have to derive the liquidation value of an asset, which has to be shared with the members of committee of creditors only after the receipt of resolution plans. To do so, the IRP has to obtain an undertaking from the members that they shall not disclose the liquidation value and not use it to cause undue gain or loss.