The committee reviewing the Insolvency and Bankruptcy Code (IBC) has proposed that a case admitted for resolution can be withdrawn if 90% of creditors agree, implying that unsuccessful bidders could get back in the reckoning for an asset with a better deal. That would also mean lenders taking less of a haircut.
The 14-member committee, which submitted its 90-page report to finance minister Arun Jaitley on Monday, also proposed a relaxation in the application of the ineligibility clause for “related parties” and “connected persons” that will benefit foreign institutional investors (FIIs), foreign portfolio investors (FPIs) and overseas venture capital investors. This and other suggestions are aimed at widening the pool of likely bidders while keeping out wilful defaulters.
The government is expected to move amendments to the IBC based on the recommendations of the report, which ET has seen.
Changes Should be Prospective
ET reported on Tuesday that the review panel called for changes aimed at easing insolvency rules for small enterprises and providing relief to home buyers. In the past few weeks, ET has reported on several of the committee’s suggestions that have been included in the final report.
In case a debtor initiates insolvency proceedings on its own, the committee has suggested that the proposal should be approved by shareholders through a special resolution or three-fourths of all partners. The committee has proposed that all changes be prospective and apply to fresh cases that come up for resolution.
In the recent case of bankrupt Binani Cement UltraTech has said it concluded an acquisition deal with the promoters after a consortium led by Dalmia Bharat Cement had made the winning bid.
Amendments recommended for the IBC’s Section 29A, which bars connected persons and related parties, will be applicable to all cases in which the resolution plan has not been submitted when the changes come into force.
The provisions are aimed at making sure that promoters who are wilful defaulters are prevented from bidding for companies during the resolution process unless they-’ve repaid their dues.
The committee took note of judgements by the National Company Law Tribunal (NCLT) and appellate tribunals to recommend that rules be amended to provide for withdrawal of resolution plans after they’re agreed upon if the committee of creditors approves by 90%.
It noted that there have been instances in which cases were allowed to be withdrawn following settlements between debtors and applicant creditors.
The committee reviewed the case of financial creditors holding the debt of insolvent companies but were excluded from the committee of creditors (CoC) as they held shares or preference shares in the entity following earlier conversion of debt to equity as part of restructuring. Under the current law, they become related parties and ineligible from CoC membership. The committee has recommended that such creditors, if regulated by financial sector regulators, should not be considered related parties therefore eligible for inclusion in the CoC.
It also recommended that ‘related party’ be should be interpreted as per the definition in the Companies Act 2013 and included in the IBC. It said that ‘related party’ as it applies to an individual must also be defined in the IBC.
The committee suggested widening the scope of the IBC so that entities such as housing finance companies, which are not regulated by the Reserve Bank of India and are declared non-performing assets (NPAs) by another financial sector regulator, should also be covered under Section 29A.
A person who is a promoter or a related party in any such company will also be disqualified from bidding for insolvent companies.
The committee has also proposed that financial creditors, including registered foreign institutional investors, foreign portfolio investors and foreign venture capital investors should be exempted from disqualification under clause (c) of Section 29A.
The clause bars persons who have an NPA account or control or are promoters or part of the management of a corporate debtor classified as an NPA account from being resolution applicants. The exemption will not be given to financial entities if they are related parties of the corporate debtor.
The provisions that bar a person because of conviction of offences punishable by imprisonment of more than three years or for being disqualified as a director need not be extended to the related parties of the resolution applicant, the committee has suggested.
The committee found that such criteria of disqualification was personal in nature.
Given the wide array of the disqualification criteria, the committee has also recommended that the resolution professional should submit an affidavit that the successful bidder is eligible under Section 29A along with the resolution plan.
GUARANTORS AND SURETIES
The committee noted that promoters often give personal guarantees for loans to their companies and may file frivolous cases to guard their assets. It, therefore, suggested inclusion of a provision to clarify that Section 14 of the IBC does not intend to bar actions against assets of guarantors to the debts of corporate debtors undergoing resolution.
The panel also sought to dilute the ineligibility imposed on guarantors to insolvent companies, reasoning that the intent of the law was not to disqualify every such entity for issuing such a pledge.
It’s recommended that guarantors be excluded from participating in the resolution plan only if the pledge has been invoked and remains unpaid in full or in part. This mean it will be kept out only if the guarantor has not met the guarantee provided.
The committee also proposed changes to Section 29A dealing with ineligibility to ensure that persons remotely related to the insolvent entity are not disqualified. The new provision will clearly provide that the section will apply to only the resolution applicant and connected persons.
“The committee felt that Section 29A was introduced to disqualify only those who had contributed in the downfall of the corporate debtor or were unsuitable to run the company because of their antecedents whether directly or indirectly,” it said, justifying the narrower focus. It was felt that this was leading to a reduction in the number of eligible bidders.
The committee has however called for tightening of the provision to include anyone who acts with the common objective, along with the resolution applicant, of seeking control of the corporate debtor to pass the Section 29A test.
It also clarified that in respect of those ineligible because of holding NPAs, this should apply only if the NPAs are held by the resolution applicant or connected persons at the time of the resolution plan submission. This means if an NPA is cleared before a resolution plan is submitted, then the plan should be eligible.