Bankruptcy law: Banks, ARCs and FPIs can bid for insolvent companies

Banks, asset reconstruction companies (ARCs) and foreign portfolio investors (FPIs) are to be allowed to bid for insolvent companies. 

This is part of the ordinance the Union Cabinet approved last week, to change the current Insolvency and Bankruptcy Code (IBC). It has to be approved by the President for taking effect; this is expected by the weekend.

The change is in Section 29 (A) of the IBC, added to this law to bar defaulting promoters, defined as those with bad debts for over a year till the time a case for insolvency was admitted by the National Company Law Tribunal (NCLT). Also, any related parties.

After various stakeholders complained about the wide scope of this clause, it is being diluted for certain sections. The change is among the recommendations of a panel on the subject, headed by Corporate Affairs Secretary Injeti Srinivas. 

Purely financial firms will be allowed to take part in the resolution process of companies undergoing insolvency; the Srinivas panel had recommended this, too. The present wording of clause (c) in Section 29A bars those with an account which is a classified as a non-performing asset (NPA) or are related parties from being resolution applicants. 

Companies that have acquired defaulting firms would be allowed to do so for three years from the date of approval of a resolution plan by the National Company Law Tribunal, sources told Business Standard.

Mamta Binani, an insolvency professional, says: “The move will open doors for more entities to bid for companies undergoing insolvency, without confusion.”

Sources in the corporate affairs ministry say they are working with the law ministry on the wording of other changes.

The Srinivas panel wants the term ‘financial entities’ to be clearly redefined in the Code, to clarify the scope of any exemption from those barred for bidding. It agreed any such exemption must not apply to financial entities if these are related parties of the promoters of defaulting companies. 

It was earlier represented to the panel that given the nature of business undertaken by ARCs, scheduled banks, alternate investment funds, FPIs and entities such as investment vehicles or foreign venture capital investors, these are likely to be related to companies and would be disqualified under 29A. 

The committee also suggested that a proviso be added to state that if an NPA account is held only because of acquisition of a company going under insolvency, the disqualification under that section would not apply.

Section 29 (A) is also being diluted for medium and small scale enterprises - the promoters here are generally bidders for the insolvent companies. Only wilful defaulters, having bad debts for over a year, would be disqualified.

Other points in the Ordinance

• Cases could be taken out of National Company Law Tribunal if 90% in committee of creditors votes in favour
• Fast-track process to be done away with
• No extension of 270-day moratorium on resolution plan