IBC: Wilful defaulters barred from bidding for stressed assets

In a blow to defaulting promoters seeking to reclaim their firms that are under insolvency proceedings, the government today promulgated an ordinance to bar wilful bank loan defaulters as well as those with NPA accounts from bidding in auctions being done to recover loans.
The ordinance aims at putting in place safeguards to prevent unscrupulous persons from misusing or vitiating the provisions of the Insolvency and Bankruptcy Code (IBC), the corporate affairs ministry said in a statement.
The amendments would be applicable to cases where the resolutions are yet to be approved.
The amendments to the insolvency law need to be approved by Parliament in its next session which is likely to begin on December 15. The changes essentially mean that certain promoters would not be allowed to bid for their own assets under the insolvency proceedings initiated to recover overdue loans.

In the first phase, as many as 12 companies with over Rs 5,000 crore of overdue loans each, including Bhushan Steel, Essar Steel, Lanco Infratech, Monnet Ispat and Electrosteel, were referred by the RBI for resolution under this law.
In several of these cases, the original promoters themselves are among the bidders.

Amid rising concerns that a defaulting promoter could wrest back control of the company that is under insolvency even as banks take a hit on the loans, the government on Wednesday approved promulgating an ordinance to amend the Insolvency and Bankruptcy Code.
President Ram Nath Kovind has given assent to the ordinance, the ministry said today.

"The amendments aim to keep out such persons who have wilfully defaulted, are associated with non-performing assets, or are habitually non-compliant and, therefore, are likely to be a risk to successful resolution of insolvency of a company," it said.
As per the ordinance, those who have their accounts classified as non-performing assets (NPAs) for one year or more and are unable to settle their overdue amounts include interest thereon and charges relating to the account before submission of the resolution plan would be ineligible.
Corporates, promoters, holding companies, subsidiaries, and associate companies or related parties undergoing insolvency resolution or liquidation under the IBC would not be eligible for bidding for the stressed assets.

Under the amended code, Committee of Creditors (CoC) has to ensure the viability and feasibility of a resolution plan before approving it.
The CoC should "reject a resolution plan, which is submitted before the commencement of the Ordinance but is yet to be approved", the statement said.
Besides, the Insolvency and Bankruptcy Board of India (IBBI) -- which implements the Code -- is being given additional powers.
The IBBI would now have powers to impose penalty of up to Rs 2 crore on those violating provisions of the IBC.
The ordinance amends six sections besides inserting two new sections in the bankruptcy code, which has been operational for less than a year.

Over 300 cases have already been approved by the National Company Law Tribunal (NCLT) to be taken up under the law.
Commenting on the ordinance, an Essar Steel spokesperson said the company is not a wilful defaulter.
Bhushan Steel Ltd and Bhushan Steel and Power CFO Nitin Johri also said "we are not a wilful defaulter... We will bid for assets if permitted".
When asked to comment, a Lanco Infratech official said the company is not a "wilful" defaulter but has NPA of Rs 8,800 crore.
On whether they would be bidding in the auction process, the official said as per the current norms, "the promoters' proposal may not find a place in the final selection."

Monnet Ispat and Electrosteel officials could not be reached for comment despite repeated attempts.
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.
Manish Aggarwal, Partner and Head Resolutions, Special Situations Group, KPMG in India, said the ordinance "signals that resolution process will ensure that existing sponsors who are covered by these amendments directly or indirectly cannot retain control of their companies at the cost of lenders by seeking huge hair cuts and being back in business".