IBC ordinance: Several companies say they are not 'wilful defaulters'

Several companies whose assets are facing insolvency proceedings on Thursday said they were not wilful defaulters and would like to participate in the bidding process if permitted.

Legal experts were of diverse opinion, with some saying that barring companies from bidding would further depress the price of such assets resulting in more losses to the banking sector, while others stressed that it would amount to a setback to credible insolvency process if existing promoters are allowed to re-acquire assets with a haircut.

The comments come in the wake of the government today promulgating an ordinance to bar wilful bank loan defaulters as well as those with NPA accounts from bidding in auctions being done to recover loans.

Commenting on the ordinance, Bhushan Steel CFO Nitin Johari said, "We are not a wilful defaulter. We will bid for assets if permitted."

However, he did not elaborate on the future plans of the company.

An Essar Steel spokesperson also said the company is not a wilful defaulter.

Essar Group had earlier submitted expression of interest for Essar Steel and said it will submit a resolution plan to the insolvency resolution professional (IRP) within the scheduled time frame.

Asked about the rationale for bidding, the spokesperson saidthe Insolvency and Bankruptcy Code (IBC) allows promoters to bid for their company at the NCLT and there are no limitations.

Essar Steel was among the initial 12 companies identified by the Reserve Bank of India (RBI) for insolvency proceedings.

Essar Steel owes about Rs 45,000 crore to lenders.

A Lanco Infratech official said the company is not a wilful defaulter but added that its current NPA stood at Rs 8,800 crore.

Asked whether the company is bidding for its own assets, the official said, "As per the current norms, the promoter's proposal may not find a place in the final selection."

JSW Steel Chairman Sajjan Jindal said the government's move towards streamlining the IBC process will facilitate healthy competition.

"Happy to see the government's intent in moving swiftly towards streamlining and bringing credibility and transparency in the IBC process," he said in tweet.

Monnet Ispat, Electrosteel and ABG Shipyard did not respond to repeated calls.

Legal experts said a cursory reading indicates that the ordinance purports to disqualify a whole cross section of people from making resolution applications under IBC which will reduce the pool of resolution applicants, which will in turn depress the value of assets put on the block and ultimately cause a loss to the banking sector itself.

Nishit Dhruva, Managing Partner, MDP & Partners said, "The need of the hour is to amend the law to ensure that only deserving candidates are allowed to bid for stressed assets under the Corporate Resolution Plan. Otherwise it would be a setback to the credible IBC process if the existing promoter is allowed to re-acquire the asset with a haircut."

He said the ordinance will ring fence the corporate debtor undergoing the resolution process from promoters who are wilful defaulters.

"This would ensure that the company does not face the same fate it has suffered in the hands of the current management and would streamline the process for selection of buyers as resolution applicants for stressed assets," he added.

Dhruva further said that certain guidelines for the Committee of Creditors to take a decision based on creditworthiness, credibility and other parameters, would pave the way towards appropriate resolution.

Shardul Shroff of Shardul Amarchand Mangaldas said: "These amendments will save the government 'blushes' in a situation where promoters of existing corporate debtors seeks massive haircuts in the guise of a resolution applicant in relation to a resolution plan".

There is clear logic that those persons who have caused the insolvency or losses to the banking system cannot be beneficiary of the very asset that they have rendered non- performing at a reduced cost, he added.

Diwakar Maheshwari, Partner, Khaitan and Co opined that while the ordinance in anticipation can be argued to augment the objective of the Code, "however, its future would depend how it is successfully enforced by various pillars of the Code, namely, the Resolution Professionals, Insolvency Board (IBBI), and NCLT".

The ordinance that comes as a blow to defaulting promoters seeking to reclaim their firms that are under insolvency proceedings, aims at putting in place safeguards to prevent unscrupulous persons from misusing or vitiating the provisions of the IBC, the corporate affairs ministry said in a statement.