Bankruptcy code to be amended

Ordinance likely to ban wilful defaulters from regaining control of companies

Corporate Affairs and Finance Minister Arun Jaitley. File photo

The Union Cabinet on Wednesday approved a proposal to promulgate an Ordinance to amend the Insolvency and Bankruptcy Code (IBC).

Official sources said the move is to strengthen the IBC by explicitly preventing certain persons — including wilful defaulters, disqualified directors, those who have indulged in fraudulent transactions as well as promoters whose account is classified as non-performing assets (NPA) beyond a prescribed duration — from regaining control of the defaulting company through the backdoor in the garb of a resolution applicant.

Robust support

The IBC provides for an effective and robust legal framework for “time-bound insolvency resolution to release assets locked up in NPA and promote maximisation of value of assets, failing which, under-utilised resources of unviable business are released through liquidation.”

These amendments have been proposed because in the initial phase of the Corporate Insolvency Resolution Process (CIRP) under the IBC, a number of cases are likely to have long pending default requiring deep haircut for the creditors, the sources said.

The ordinance is likely to be tabled during the winter session of Parliament with a view to get its nod soon.

The President’s nod for the ordinance is expected shortly.

The move boosted the shares of Public Sector Banks as they gained 1-4% intra-day. Incidentally, the decision comes a fortnight after the Insolvency and Bankruptcy Board of India (IBBI) amended its CIRP Regulations to ensure that as part of due diligence, prior to approval of a ‘Resolution Plan’, the antecedents, credit worthiness and credibility of a Resolution Applicant, including promoters, are taken into account by the Committee of Creditors (CoC).

Corporate Affairs and Finance Minister Arun Jaitley told reporters, “Some changes are proposed to the IBC. Since this is being done by an ordinance, till it is approved, as a matter of propriety, we don’t give details. But the fact that the Cabinet has recommended such an ordinance is the information I am giving.”

On speculation that the ordinance will limit wilful defaulters from picking up stressed assets, Mr. Jaitley said: “I won’t react on its contents as the recommendations are still with the President and till it gets the assent, we normally don’t comment. The whole process is at an advanced stage, and therefore, you want to make it go on a correct track. That’s the reason.”

A senior official said the government is keen to ensure that promoters of defaulting firms are prevented from bidding for businesses that they ran to the ground in the first place. “If as part of the insolvency process, the bank takes a 40% haircut on its exposure to a particular business, the same promoter is then able to make a bid for the business, then the only loser in the process is the banker. Why should such a system be perpetuated?” the official said.