The Bankruptcy Code will soon be the final word on matters relating to the rescue of sinking companies, even if detective agencies investigating fraud by their owners and executives are itching to take matters into their hands.
A set of amendments to the Insolvency and Bankruptcy Code (IBC) that the ministry of corporate affairs will move in the ongoing winter session of Parliament will make it prevail over other laws including the Prevention of Money Laundering Act (PMLA), a person with direct knowledge of the matter said. This is being done so that new investors putting up money to rescue bankrupt companies under the supervision of company law tribunals are protected from liability arising from the wrongdoings of previous managers and shareholders.
The rescue of bankrupt Bhushan Power and Steel Ltd (BPSL) by the second largest private steelmaker in the country, JSW Steel, is currently stalled on account of complications arising from a probe by the Enforcement Directorate and the attachment of BSPL’s assets.
The government intends to introduce a ‘non obstante’ clause in IBC that will be sufficient to give the Code primacy notwithstanding any conflicting provisions in other statutes as IBC is a newer law, said the person, who spoke on condition of anonymity. This will give protection to new investors. “In due course, if needed, one could think of amending the Companies Act or the PMLA,” said the person.
The amendments will also make it clear that criminal liability of the previous management and shareholders will continue. There, however, will be no protection to the company in the hands of new investors and management for any contingent liability, which the new investors will anyway take into account while preparing their financial bids.
“IBC is a specialized law and bankruptcy resolution is executed under the supervision of company law tribunals. How can an eligible investor, who is not a related party, paying a consideration to take over a bankrupt company as a going concern be encumbered with actions against the wrong-doings of the previous management or promoter?” said the person.
According to Sumant Batra, managing partner of law firm Kesar Dass B. & Associates, the move to ring-fence new promoters and management from prosecution and other proceedings arising from the misdeeds of erstwhile promoters and management will help incentivise more bidders to come forward and realise better value for the asset.
Manoj Kumar, partner, Corporate Professionals, a consultancy, said investors buying stressed assets under the bankruptcy resolution process would like to have finality on the total cost and litigation, which is very important to making the investment decision.
Batra said the challenge, however, lies in dealing with the assets that are suspected to form part of proceeds of crime. “If the assets remain exposed to attachment under PMLA it will continue to pose challenges. This is the tough one to deal through an amendment in IBC,” he said.
The National Company Law Appellate Tribunal (NCLAT) which had approved a ₹19,700 crore bid from JSW Steel to take over BPSL, subsequently stayed the transfer of payment by the bidder to the creditors of BPSL, pending an investigation into allegations of fraud and money laundering by the former owners of the steel mill. Bhushan Power, which had accumulated a debt of ₹47,000 crore, was part of the original dirty dozen cases identified by the Reserve Bank of India to be referred to bankruptcy courts.