Insolvency and Bankruptcy Code (IBC) came into force in 2016 with the goal of easing the resolution of stagnant corporate debt.
Recently, an ordinance was passed, which significantly amends the original law and risks defeating the very intent of IBC.
What is the intent of the amendment?
IBC was enacted to ensure time bound corporate debt resolution through proceeding initiated by either the creditor or debtor with the ‘National Company Law Tribunal – NCLT’.
In the original IBC, there was a possibility for defaulters to apply as bidders in the liquidation (auctioning assets) process.
This would have helped them regain control of their own companies with a reduced loan burden than before.
This was seen as a clever way to gain loan reductions that could possibly impact the credibility of the insolvency resolutions.
It has hence been considered necessary to prohibit unscrupulous defaulters from submitting resolution plans under IBC.
The current ordinance specifies the categories of persons who are deemed ineligible henceforth to ensure credible debt resolution.
What is the problem with the amendment?
Purpose of IBC - IBC is not merely an instrument for liquidation.
Instead, it is also envisioned as an enabling legal framework for the “reorganisation and insolvency resolution of corporate entities”.
It fact, it even prescribes a time bound procedure for “maximising the asset value of such entities and to promote entrepreneurship”.
Amendment - Wilful defaulters have put creditors to substantial financial hardships and barring them from bidding is a good move.
But the category of people barred under the current ordinance is too broad and risks defeating the very objectives of IBC.
The ordinance’s scope & wording is such that all loans that have become NPAs can be branded as wilful default.
Even, the promoters and members of the management board of companies whose loan accounts are classified as non-performing for just 1 year (or more) have also been barred from bidding.
Notably, the amendments have been made with retrospective effect to also cover the more than 600 cases already referred to NCLT.
The Business – Also, the complete barring of all original owners from bidding for assets might not make economic sense.
This is because they would have a better knowledge of the market dynamics and might have nurtured a clientele that might be difficult to emulate for other bidders.
Barring them could potentially prolong debt servicing as the new management might take time to set in.
Do all NPAs necessarily mean wrong intent?
The central bankers have often pointed out that not all bad loans are a result of intentional default on the borrower’s part.
Companies in some sectors have struggled to service debts due to unpredictable external factors that adversely impacted their finances.
Promoters of such firms from should be given a chance to restructure and turnaround their business.
Barring them merely because their loans have turned sour is unfair to both the entrepreneur and the enterprise itself.
Steel Industry’s Case - Steel companies were among the worst hit in the wake of the global downturn in commodity prices.
It has been reported that the promoters of some of these debt-laden steelmakers were considering participating in bids.
They wanted to restructure debts and their businesses and were hoping to run them again – which the current amendment hinders.
What is the way forward?
The ordinance is expected to be tabled in the winter session of the parliament in December.
It needs to be debated thoroughly and a more rationale debt resolution framework needs to be evolved.
Else, instead of solving the NPA problem, IBC could aggravate it.
The robustness of the insolvency framework is bound to have a significant impact on investments in the economy.
