In a move that will remove the final hurdle for companies taking over stressed firms, the Union Cabinet on Wednesday approved an amendment to the Insolvency and Bankruptcy Code (IBC) that prohibits attaching assets of companies resolved under the mechanism for offences committed by the previous management or promoters.
The decision assumes significance as there have been instances of enforcement agencies taking action against companies whose resolution process has already been completed. The government had received several representations from companies such as JSW Steel and Tata Steel on issues that cropped up after the closure of the IBC process.
“This is long-awaited relief being provided to the acquirers. It establishes the principle of equity, that acquirers can take over assets clear of all claims and, especially, past doings of the promoters and directors. If an acquirer pays for the asset, then he should get a clean asset with no uncertainty on its title,” said Anshul Jain, partner, PwC India.
Tata Steel BSL (formerly Bhushan Steel) mentioned in its annual report that the company was impleaded in a proceeding initiated by the Directorate of Enforcement (ED) relating to the confirmation of a provisional attachment order of Rs 50 lakh. The amount was seized by the Central Bureau of Investigation in relation to an allegation of payment of illegal gratification made against the previous managing director of the company.
“The government has brought much-needed amendments to the IBC. Ring-fencing the companies resolved under the IBC from regulatory actions during past management was much needed to make the IBC process attractive for investors and acquirers,” said Manoj Kumar, partner, Corporate Professionals.
JSW Steel had sought relief from statutory authorities in connection with its resolution plan for Bhushan Power & Steel. However, the National Company Law Tribunal (NCLT) approved its Rs 19,350-crore resolution plan without granting relief. The company has appealed against the NCLT order. In its appeal, JSW said that in the absence of protection as prayed and liability resulting from criminal proceedings, the appellant would not be liable to implement the resolution plan as it would be unviable and unfeasible.
In another major relief to stressed assets, the Cabinet approved the proposed IBC amendment that the licences, permits, concessions, and clearances for a corporate debtor cannot be terminated or suspended or not renewed during the moratorium period. This has been done to “ensure that the substratum of the business of corporate debtor is not lost”.
In many IBC cases in the telecom and mining sectors, government departments moved to take away the licence of the corporate debtor. The Ministry of Corporate Affairs (MCA) will issue a clarification in this regard in keeping with the last set of amendments to the IBC that made a resolution plan binding upon all stakeholders, including the central government, state governments and local authorities, to whom a debt in respect of the payment of the dues may be owed.
“The protection of insolvent companies from cancellation of licences, permits, etc, was necessary to ensure them as going concern and make them value proposition for the acquirers. Hope these amendments would make resolution of insolvent companies easier and ensure much better realisation for stakeholders,” Kumar added.
The Cabinet also allowed amending the code to streamline the corporate insolvency resolution process and protect last-mile funding to boost investment in financially distressed sectors.
The MCA had received representations from various fund managers and private lenders who provide rescue financing to stressed projects, urging that they be given special protection if an entity lands in the insolvency court even after their assistance.
Besides, the IBC amendment Bill will introduce additional thresholds for financial creditors represented by an authorised representative due to large numbers in order to prevent frivolous triggering of the Corporate Insolvency Resolution Process.
The amendment being brought to rein in the rising number of cases where a single homebuyer could trigger insolvency against a company. “Similar to class-action suit, individual homebuyers will not be able to trigger insolvency. Section 7 of the IBC is likely to be amended in this regard,” Kumar said.
The government is also amending Section 29A, which deals with the disqualification of defaulting promoters and related parties from taking part in the corporate insolvency resolution process. The definition of related party is likely to be changed with a reduced list of persons who can bid, according to people in the know.