The Insolvency Law Committee was appointed to look into contentious issues plaguing the NPA resolution process.
The Committee has addressed many contentious issues, but some disagreements have been flagged by NCLT.
What are the differing views?
Under the Insolvency & Bankruptcy Code (IBC) - Insolvency Law Committee was tasked to assess the operational and interpretational issues in the Code.
Subsequently, conflicting rulings were given out by National Company Law Tribunal (NCLT) and the Law Committee on numerous appeals.
NCLT through section 29 has restricted eligibility criterion for bidders to keep out errant and wilful defaulters from buying back stressed assets.
But the law committee’s recommendations to streamline ‘Section 29A’ and widen the pool of eligible bidders have been a majorly contested aspect.
The law committee has now narrowed the list of debarred entities to only those closely related to defaulting promoters.
Also, the committee has sought to enable “pure-play financial entities like asset reconstruction companies, alternate investment funds” for bidding.
Additionally, only a time bound 3-year restriction has been placed for bidders who’ve acquired an NPA, in order to not allow well intentioned buyers.
What are the other significant rulings of the committee?
In most cases, the money given by home buyers as advance to the defaulting firms is much higher than the money lent by banks.
The committee has hence recommending that home buyers be treated as financial creditors in order to grant them more say in the resolution process.
Also, the approval threshold for a resolution plan has been reduced from 75% of the home buyers to 66%, which will thereby enhance speedy resolutions.
The committee has also clarified that all assets of guarantors to the corporate debtor will be outside the scope of freeze.
This will thwart promoter’s efforts to delay recovery by lenders against their personal assets.
What is the way ahead?
The tussle between operational and financial creditors warrants more attention.
Poor recovery for operational creditors (money or good supplied in advance) can snowball into fresh NPA for banks from the SME space.
Hence, like in the “Sick Industrial Companies Act”, we can mandate the acquirer to issue a public notice inviting objections to the resolution plan.
Also, Indian companies filing bankruptcy in the foreign destinations with nefarious intention needs to be plugged through a cross border insolvency law.
While the Committee recognizes this, it has not laid down suggestions.
