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Nov 23, 2017

President clears stricter version of Insolvency and Bankruptcy Code

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President Ram Nath Kovind gave his assent to an ordinance amending the Insolvency and Bankruptcy Code (IBC) on Thursday, barring errant promoters of defaulting companies from regaining control of their assets being sold under the bankruptcy process.

While experts welcomed the move as sending a strong signal against crony capitalism, some expressed concern that such stringent criteria for potential investors could reduce the number of revival proposals that may come up.

The IBC ordinance bars not only wilful defaulters, but also several other categories such as guarantors to the debtor, those with loans classified as non-performing assets (NPAs) for at least a year, those convicted for any offence with a prison term of more than two years, directors in companies that are disqualified, entities barred by the capital markets regulator, those who have been found to have struck fraudulent transactions with the firm, and connected entities.

The amendments also distinguish individuals and those who run small proprietorships into two categories so that a small individual businessman or trader can file for bankruptcy resolution for one of his businesses without himself undergoing personal insolvency proceedings.

“There could be a case where only one of the proprietorship firms of an Individual would be admitted in insolvency leaving the other proprietorship firms of the same person,” said Manoj Kumar, partner and head (M&A and transactions) at law firm Corporate Professionals.