What are the key provisions of Section 74 of IBC and why is it in news?

Amtek Auto lenders are looking to invoke Section 74 of the Insolvency and Bankruptcy Code (IBC) against Liberty House for its failure to comply with the approved resolution plan for the automotive component maker. This would be the first instance that the section would be invoked. Aashish Aryan and Veena Mani explain what invoking the section entails.

What are the key provisions of Section 74 of the IBC?

Section 74 lays down the provisions to penalise officials of corporate debtors, creditors and bidders if and when they violate the moratorium and other terms of a resolution plan as approved by a committee of creditors as well as the adjudicating authority.

Officials of the corporate debtor who violate the moratorium can be imprisoned for a minimum of three years, which may be extended to five years. Such officials will also be fined a minimum of Rs 100,000 but not more than Rs 300,000. 

Officials of creditors who violate the norms can be jailed for a minimum of one year and a maximum of five years. Such officials will also be fined a minimum of Rs 100,000 with the maximum penalty of up to Rs 10 million.

Officials of bidders, who have been declared successful resolution applicants under Section 31, and who violate the norms can similarly be imprisoned for a minimum of one year with a maximum tenure of five years. They will also be fined a minimum of Rs 100,000 with the maximum penalty of up to Rs 10 million.

Are the provisions too stringent? What are the arguments for and against?

Experts are divided on whether the provisions of Section 74 are too stringent or a necessity. Insolvency experts say it is required to protect the Code from being taken lightly, and ensure that a resolution happens as planned. If the resolution applicant wants any modification he should approach the adjudicating authority instead of refusing to pay, according to these experts. Some legal experts, however, believe the possibility of this provision being invoked could deter bidders from coming on board.

Why is the section in the news at this point?

Lenders to Amtek Auto have moved the Chandigarh bench of the National Company Law Tribunal (NCLT) to invoke Section 74 against the Liberty House Group. The $15-billion Liberty House, an international metals and industrial group led by UK-based Indian entrepreneur Sanjeev Gupta, had made the winning bid for Amtek Auto earlier this year. Reports also suggest that the Section could be invoked against Adani Wilmar for backing out of the Ruchi Soya resolution process. 

In the case of Amtek Auto, the successful resolution applicant Liberty House failed to pay the banks according to the terms of the resolution plan approved by the adjudicating authority. Liberty House alleges that there were serious issues in the information and valuation reports shared with it prior to the bidding process. The company had made the winning bid for Amtek Auto at Rs 42 billion in July this year, but has not since paid any amount to the banks. 

Adani Wilmar, on the other hand, has written to the resolution professional of Ruchi Soya asking as to why it should pay the same price for assets that had significantly deteriorated in valuation owing to the delay caused by the other bidder’s litigations in courts. The other bidder in that case was Patanjali Ayurved. 

What are the steps to be followed once Section 74 is invoked?

Once the Section is invoked by the Committee of Creditors, it is up to the adjudicating authority (which is the NLCT) to decide on the course of action with respect to the corporate debtor. In the case of Amtek Auto, the NCLT will also have to examine the claims of Liberty House as to whether there were actually some differences in the valuation indicated at the start of the process and the real valuation of the assets. The NCLT can then either decide to allow the resolution professional of the corporate debtor to invite fresh bids, or penalise the erring bidder with jail and fine as per the provisions of Section 74. In case there are no fresh bidders, the NCLT can also allow liquidation of such corporate debtors. Since this is the first time that Section 74 is being invoked by lenders, the decision of the NCLT will likely set a precedent for future cases.

Is Section 74 more likely to solve the problems at hand or exacerbate them?

Experts are divided on this issue too. While some say that this could bring seriousness into the entire corporate insolvency resolution process; others are of the opinion that this could further deter bidders from a market that anyway lacks good resolution plans. Lawyers also say that penalising only the bidder is unfair as delays often happen due to litigations involving other bidders or even the debtor.