The government’s recent amendments to the IBC have received a mixed response.
What is IBC?
“Insolvency & Bankruptcy Code (IBC), 2016” constituted a single window process for a time-bound settlement for corporate & individual loan defaults.
Either the creditor (banks) or the loaner (defaulter) can initiate insolvency proceedings by submitting a plea to the adjudicating authority.
The adjudicating authority for corporate insolvency proceeding is the “National Companies Law Tribunal (NCLT)”.
In the process, the defaulting company is either be sold to a potential buyer as a whole or it could get liquidated and have its assets auctioned.
The earnings so obtained is then used to settle the creditor, which would most certainly involve accepting a big loss due to under-recovery.
What is the recent ordinance about?
Initially, in IBC, a promoter could declare insolvency for his firm and then participate in the bidding process for the same and acquire it.
This opened up the possibility of wilful default as the insolvency proceedings would help in getting a loan haircut (reduction).
Hence recently, IBC was amended by the government through an ordinance to deter such wilful defaulters from bidding either directly or indirectly.
Notably, the ordinance also excludes companies whose interest and charges are outstanding for a period of 1 year or more from the bidding process.
The amendment mandates the appointment of a ‘Resolution Professional (RP)’ for every case, to do the background checks for all bidding applications.
But some argue that disqualifying errant promoters from the bidding process will lead to further losses for banks.
What are the possible outcomes?
Positive - Most loans that land up for in insolvency proceedings are likely to have already been restructured by the banks in the past.
The fact that repayment has failed even after such restructuring, raise serious questions on the credit-worthiness of the loaners.
Hence, barring promoters of such companies is only logical.
Thus, the ordinance creates the scope for disqualifying an existing promoter or including a rank outsider into the bidding process.
Negative - The Insolvency and Bankruptcy Board of India (IBBI) is the regulator, which was set up under the IBC.
But several advisory committees of the IBBI, entrusted with corporate insolvency & liquidation, are chaired by several top corporate leaders.
This could be tricky for the credibility of IBC and the recent ordinance may be misused to defeat the very objective of penalising the errant promoter.
Banks will only lose more, if these designs help in side-tracking loan recovery and aid influential people to purchase distressed assets at low prices.
