At the heart of the problem is Section 29A, a new section of the Insolvency and Bankruptcy Code, 2016, that makes certain persons ineligible to be a resolution applicant. Those being made ineligible include:
a) willful defaulters
b) those who have their accounts classified as non-performing assets for one year or more and are unable to settle their overdue amounts include interest and charges relating to the account before submission of the resolution plan
c) those who have executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor undergoing a corporate insolvency resolution process or liquidation process under the Code
d) and connected persons to the above, such as those who are promoters or in management of control of the resolution applicant, or will be promoters or in management of control of corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party of the above referred persons.
“Let us understand the basic principle behind the code. The intention of the code is that first resolution should be attended and if the resolution fails, then liquidation should be attempted. The meaning of liquidation is selling of the assets, which will mean the company is no longer in existence and if this happens many workers will also lose their job,” says Manoj K Singh, Founding Partner, Singh & Associates.
However, Singh says by taking away the promoters, their family or anyone who has defaulted earlier, we are going for compulsory liquidation in most of the cases.
“It seems most of the companies will not be able to achieve the resolution plan in the 180 days or the extended period of 270 days. After that the mandate of is to liquidate the company and that is what is going to happen,” says Singh.
Singh adds that shutting down companies will not resolve the issues around bankruptcy and while the intention of the code is the revival of the company, the ordinance seems to be at odds with this.
“This new Ordinance will have no effect on large companies and its promoters. Large companies have immovable assets and a large product line and even if there is a liquidation of such company, there will be many buyers in the form of competitors would want to take over the business. If you are buying stressed assets from a company that has, for example, large land bank, plant and machinery that would take someone considerable amount of time to set it up from scratch, a buyer can then save a lot of capital expenditure by buying such companies at a discount,” says Singh.
The problem, says Singh, will be for the micro, small and maybe even medium enterprises. “Most small companies I think will be liquidated because they will find it very difficult to find a buyer and a resolution would not be easy for them. This is primarily because smaller companies are promoter centric companies, owners that know their business and where much of the business is on a personal reputation basis,” says Singh.
Singh adds that the number of resolution applicant, especially in the case of a small and medium business, will be Limited and for this reason banks and financial institutes me not find this ordinance and law very useful. By barring the promoters from taking part and shrinking the resolution applicant group, SMEs will find the ordinance particularly tough.