For smoother resolution – Business Line–10.04.2018

The Insolvency Committee has addressed many contentious issues plaguing resolution process

In view of conflicting rulings by the National Company Law Tribunal (NCLT), numerous appeals, and the ongoing tussles under the Insolvency and Bankruptcy Code (IBC), the Insolvency Law Committee that was tasked to assess the operational and interpretational issues in the Code has hit the right note. The highlight of the panel’s recommendations is streamlining Section 29A that widens the pool of eligible bidders. This section, introduced last year to keep out errant and wilful defaulters from buying back stressed assets, had thrown a spanner in the works for meaningful resolution. For instance, Section 29A had debarred related parties and connected persons of defaulting entities from bidding. This had resulted in inclusion of a wide gamut of persons within the scope of Section 29A. The panel has now narrowed the list of debarred entities to only those closely related to defaulting promoters. By exempting pure-play financial entities from the ambit of Section 29A, the committee also seeks to ensure that asset reconstruction companies, alternate investment funds etc., are not unintentionally disqualified. Also, by offering a three-year dispensation to bidders who have acquired an NPA account due to acquisition of corporate debtors under the IBC, the committee has ensured that well-intentioned buyers are not precluded from bidding for other accounts.

The committee is also correct in recommending that home buyers be given the status of financial creditors. Given that in most cases, the amount of money given by home buyers as advanceis much higher than the money lent by banks, this could grant more say for home buyers in the resolution process. Reducing the threshold for approving a resolution plan from 75 per cent to 66 per cent will also prevent needless dissolution, turning the focus back on resolution and turnaround. The committee has also cleared the air over one of the most litigious areas by clarifying that all assets of guarantors to the corporate debtor will be outside the scope of moratorium. This, in effect thwarts promoters’ efforts to delay recovery by lenders against their personal assets.

There are other issues, however, that need review. The ongoing scrimmage between operational and financial creditors warrants more attention; poor recovery for operational creditors can snowball into fresh NPA issues for banks from the SME space. The Code, drawing lessons from the Sick Industrial Companies Act, can mandate the acquirer to issue a public notice inviting objections to the resolution plan; this will only be in line with the principles of natural justice. Nirav Modi’s companies filing for bankruptcy in the US also bring to the fore the need for a robust cross border insolvency law. The Committee, while recognising this, has not laid down suggestions. Nevertheless the report is a laudable effort to address key issues.

via For smoother resolution – Business Line

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