India’s Insolvency & Bankruptcy Code Needs Amendments

Promoters affected by pandemic should be allowed to bid for their own companies during insolvency resolution

India’s Insolvency & Bankruptcy Code Needs Amendments
Sunil Kanoria 11 June 2021

In the wake of the second wave of the pandemic, certain segments of industry are demanding a postponement of the Insolvency & Bankruptcy Code (IBC) by another year. However, that is unlikely to help stressed enterprises to recover quickly, as they are more likely to face multiple litigations from financial and operational creditors. IBC provides protection from such litigations. Many of these stressed borrowers do not even have the wherewithal to handle such complications.

The need of the hour is a series of quick amendments in the IBC, so that stressed enterprises can take this route for an orderly resolution.

(A) Rescinding Sec. 29A of IBC

Section 29A disallows promoters of stressed non-MSME companies from bidding for their company during the resolution process.

Why Sec 29A should be rescinded:

  • In cases where promoters have been victims of circumstances beyond their control, there should be no reason to block them from bidding for their own companies during the resolution process, as long as they are not proven to have indulged in fraud.
  • With no clarity on when the pandemic will end, companies across the board are stretched. Most are conserving their resources to deal with further uncertainties. Therefore, there isn’t enough capacity in the market to enable a successful bidding for a stressed company. In this backdrop, expecting a change in management under Sec 29A is impractical. However, some foreign funds and companies are trying to take advantage of the situation by acquiring some of these home-grown assets and enterprises at rock-bottom prices. As a result, ventures started by domestic entrepreneurs are ending up in foreign possession. It makes more sense to allow the promoters to bid for their companies.

(B) Introduction of Pre-packs

Pre-packaged Insolvency Resolution Process should be introduced quickly as such a scheme will be a pre-IBC window for resolution of troubled assets, which will complement the existing framework without substituting it. As experienced in other jurisdictions, pre-packs get disposed of in a speedy manner and the total cost involved is also substantially less, thus preserving value of the business.

The Union ministry of corporate affairs has already circulated a draft paper on pre-packs and invited comments. The paper mentions “current promoters and management usually have the first right or exclusive right to buy the business of the corporate debtor or submit a reorganisation plan”, which directly contradicts Sec 29A of IBC. Therefore, if Sec 29A is not amended, it would neutralise the efficacy of pre-packs to a large extent. Pre-packs should be rolled out only after necessary amendment is carried out in Sec 29A of IBC. Unlike a purely private restructuring process, pre-packs operate within the fold of the statutory scheme. Thus, the final outcome is binding on all stakeholders.

However, this calls for urgent capacity creation at the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) levels. The focus should be on:

  • Setting up dedicated benches of NCLT, to help speed up corporate insolvency cases
  • Providing binding guidelines to committees of creditors as well as resolution professionals, to prompt them to work in a time-bound manner
  • Creating awareness about the commercial impact of judgments delivered, and economic implications of delays in resolution, in order to improve the role of the judiciary

The writer is vice-chairman, Srei Infrastructure Finance Ltd

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.