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Mar 22, 2018

Insolvency and Bankruptcy Code changes likely to be prospective

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Changes made to the Insolvency and Bankruptcy Code (IBC) based on suggestions by a review panel are likely to be prospective and will not apply to cases already undergoing resolution, said a senior government official.

This will mean that ongoing cases in which the eligibility of bidders to participate in resolution plans has come up may not benefit from the changes under consideration.

The 14-member committee reviewing the law is expected to finalise its recommendations by the end of the week, said the official cited above. “There are still some issues which need to be resolved,” he said. “We are in the process of drafting the changes to remove any ambiguities.”

Based on the recommendations, the government is likely to move an amendment to IBC in the ongoing session of Parliament. The government tasked the panel with suggesting changes to the IBC to remove ambiguities .

ET reported last week that the 14-member committee reviewing the law favours easing the IBC’s related party norms to ensure it’s not overly restrictive and doesn’t reduce the number of those eligible to bid for assets.

Section 29A of the IBC bars certain persons and entities from bidding for stressed assets. These include undischarged insolvents, wilful defaulters and anyone with a non-performing loan among others. Any other person acting jointly or in concert with such persons is also barred from the resolution process. This provision makes a wide range of persons or entities ineligible because of ties to entities barred under Section 29A.

The issue of “connected persons” came up in the case of Essar Steel among others, raising fears of the process getting caught up in a legal logjam.

That rendered bids by Numetal and ArcelorMittal ineligible but any relaxation in the rules on this front will not be applicable to companies or individuals that have already submitted bids for companies undergoing resolution.

“The law should not be retrospective as it will then be very difficult to implement and we will see a rise in litigation,” said Manoj Kumar, partner, Corporate Professionals. “It has to be made applicable from a specific date. The only drawback could be that more cases would go to liquidation for want of clarity in the law.”

Some relaxation of norms for insolvent medium and small enterprises may also be considered as there hasn’t been much interest in them from entities other than the existing promoters.

ET reported Wednesday that the committee has recommended that the National Company Law Tribunal (NCLT) should be empowered to halt resolution proceedings if lenders agree, something that only the Supreme Court can do now. Other recommendations that ET has reported include lenders being allowed to invoke personal guarantees of promoters of companies facing bankruptcy while the resolution process is underway.

Another suggestion is that homebuyers should be treated on par with unsecured creditors and lenders should be allowed to implement a resolution plan if twothirds of them by value agree to it, versus 75% now.