The anti-promoter Insolvency (Amendment) Ordinance

The widely reported amendments to the Insolvency and Bankruptcy Code, 2016 (IBC) moved by the way of an Ordinance received the President’s assent today and will need to be ratified in the upcoming Winter Session of Parliament.

At the outset, the need for moving the IBC (Amendment) Ordinance, 2017 (Ordinance) is questionable in view of the close approaching Winter session and formation of the new Insolvency Law Committee which has been set up to review the Code.

While the Ordinance makes a number of amendments, the theme of it is to (retrospectively) bar promoters of the erring corporate debtors from being able to submit a resolution plan and regain control. This comes soon after the outrage  over Essar Group’s expression of interest in submitting a resolution plan on Essar Steel. While no direct reference has been made, several noted stakeholders (Sajjan Jindal) have raised concerns over such practice. It is being said that this would be a misuse of the IBC process and certain criteria needs to be laid down to check the creditworthiness of the applicants.

First significant amendment however, unrelated to promoters, is application of the Code to ‘personal guarantors’ of corporate debtors. Prima facie, this may be a response to the growing concern over applicability of the Code to personal guarantors especially after the Allahabad High Court recently halted any proceedings against the personal guarantors as well while the corporate debtor is facing moratorium.

The rest of the amendments, are entirely directed towards blocking promoters from buying their bust businesses for cheap.

Firstly, changes to the definition of “resolution applicant” read along with amendments to Section 25 of the Code give excessive leeway to the Committee of Creditors, which takes control over the ailing entity once it has been admitted by the NCLT for undergoing resolution process. The amendment  essentially empowers the Committee  to decide who may or may not submit a resolution plan on a case to case basis,“having regard to the complexity and scale of operations of the business of the corporate debtor”. Such a provision allows the Committee to also disapprove of otherwise meritorious applicants for a number of reasons. The IBBI has also been given the authority to intervene here by adding the words “such other conditions as specified by the Board”. As a result of this provision, the objectivity of selecting the best resolution plan has been completely eliminated.

But given that the creditors would want the best deal, that minimises their haircut on loans, the legislature has added a second layer of anti-promoter measure with the insertion of Section 29A. This new provision prohibits 8 categories ‘persons’, including wilful defaulters and persons with NPAs for over a year, from submitting a resolution plan. To leave no scope for ambiguity, ‘connected persons’ to any of these 8 categories have also been barred from applying as resolution applicants, the connected persons being promoters or a related parties.

Thirdly, an amendment to section 35 has been carried out, which further bars the liquidator to sell any assets to a person who is barred to be a resolution applicant under the above provisions.

While the provisions of the Ordinance do not appear to apply to resolution plans admitted by the NCLT, this may create a problematic situation for Synergy Dooray case where the debtor company was merged with a related party itself, while undertaking a 95% haircut.

(Read the Ordinance)