Move to help restore confidence of investors and bankers in the IBC process
The Centre has taken the Ordinance route to effect an amendment in the Insolvency and Bankruptcy Code (IBC) so as to ring-fence the corporate debtors (already in the hands of a successful resolution applicant) from attachment/criminal proceedings against offences committed prior to the commencement of their insolvency process.
The reforms form part of the Insolvency and Bankruptcy Code (second amendment) Bill 2019, which was introduced in the just concluded winter session in the Lower House, but did not get passed. An Ordinance to ring fence the corporate debtor that has gone through IBC is significant as it would immediately help restore investor and bankers’ confidence in the whole IBC process, said corporate observers.
It removes the threat of attachment of assets of a company due to the sins of the previous promoters. The Ordinance would definitely widen options in terms of interested bidders and encourage more resolution applicants to come forward to bid for stressed assets, without the Damocles sword of attachment of assets/criminal proceedings swinging over their heads, experts said.
The reform on ring-fencing is significant as it would give the person bidding for a company enough assurance that new management and remaining assets of the company are safe. It is only with that legitimate expectation that someone will invest in the company and assets would command a price commensurate with their value.
Interestingly, the latest Ordinance covers only the aspect of ring-fencing corporates from prosecution for past sins.
It does not cover other amendments proposed in the Bill such as the introduction of additional thresholds for financial creditors represented by an authorised representative due to large numbers (read home buyers) in order to prevent frivolous triggering of corporate insolvency resolution process (CIRP). It may be recalled that the Bill had stipulated that at least hundred allottees under the same real estate project or 10 per cent of total number of allottees under the same real estate project, whichever is less, is required to initiate CIRP.
‘Crucial for IBC success’
Bharat Chugh, Partner, L&L Partners and a former judge, said: “The Ordinance is a good one and was urgently needed. These changes providing for the immunity to the new management of the corporate debtor, post a successful resolution plan, are most crucial to make IBC a success.”
This would definitely encourage more bidders to bid for stressed assets — without fear of criminal prosecutions and without fear of attachment of the assets/property of the company under revival, he said.
The reform on ring-fencing is significant as it would give the person bidding for a company enough assurance that the new management and remaining assets of the company are safe.