The Insolvency and Bankruptcy Code (IBC), 2016 is a giant leap forward from earlier regulations, which had no organised resolution processes and stakeholders had to approach different forums to resolve issues. With the interests of all parties — lenders, borrowers and operational creditors — addressed under a unified law, the resolution process will be quicker and more efficient now.
But the implementation of the new bankruptcy code has not been without challenges. Several amendments and rulings over the past year have sought to address these grey areas.
Key amendments
One of the key amendments to the IBC, recently passed in the Lok Sabha, is to exclude wilful defaulters and promoters of companies whose accounts are classified as non-performing assets (NPA) for one year or more, from buying back their assets. With increasing instances of erstwhile promoters queueing to pick up stressed assets at rock bottom prices, the amendment will act as a deterrent to chronic defaulters and fraudulent promoters attempting to regain control of their company.
The process of selecting buyers was streamlined following concerns that emerged when a resolution plan was drawn up by an entity related to corporate debtor Synergies Dooray Automotive. Questions were raised about the plan, which was approved by the National Company Law Tribunal (NCLT) at a steep haircut of over 90 per cent.
Liquidation value
Another important amendment, made this week, was to do away with the mandatory disclosure of ‘liquidation value’ in the information memorandum by resolution professionals. Banks have been lobbying against the mandatory disclosure of liquidation value, which they believe impacts the value of bids by prospective bidders.
Under the IBC, once a company is admitted for insolvency resolution, an interim resolution professional (IRP) is appointed. Within 30 days the IRP calls for claims from creditors and appoints a valuer to arrive at the company’s liquidation value. According to market players, disclosure of liquidation value in the information memorandum impacted the value of potential bids as buyers often ended up bidding at similar valuations — close to, or at a slight mark-up to, the liquidation value.
The amendment says the resolution professional can provide the liquidation value to every member of the committee of creditors after obtaining an undertaking that the confidentiality of this information shall be maintained.
The amendment also seeks to allay the concerns of dissenting creditors who do not agree to the resolution plan. Under IBC, after the case is approved by the NCLT for insolvency, the professional prepares a resolution plan within the stipulated time (180 days, with 90 days extension). This has to be approved by the committee of creditors — 75 per cent of financial creditors by value.
The amendment states that a resolution plan needs to identify specific sources of funds that will be used for paying the liquidation value due to dissenting creditors. Hence, dissenting creditors are at least assured of the liquidation value and know the amount they will be paid eventually, if they do not agree with the resolution plan.
Noose tightens
Another key amendment relates to the commencement of Part III of the Code, which pertains to individuals and partnership firms. In many of the 400-odd cases admitted by the NCLT under the IBC, it has been found that promoters, also acting as personal guarantors to corporate debt, resort to the Code to delay recovery efforts of lenders against their personal assets.
The necessary amendment to the Code, which will soon operationalise the individual insolvency regime with respect to guarantors and corporates, will synchronise the proceedings of both the corporate debtor and personal guarantor.
In India, particularly in the SME sector, personal guarantors to corporate debt are mostly promoters or directors of a company. In most cases, personal guarantees are several times the net worth of the guarantor, or more. In the past, promoters have been able to stall proceedings by filing ingenious cases under the Debt Recovery Tribunal (DRT) or high courts.
Under the new Code, lenders will be able to initiate insolvency action against both the company and personal guarantor.
If the personal guarantor is taken into insolvency, and eventually bankruptcy, the entire assets of the individual (excluding “excluded assets”) will vest in a bankruptcy trustee. The excluded assets include a house of minimal value and about 65 sq mt, bare jewellery, clothing and domestic furniture. All the remaining assets of the individual are vested in the trustee, who sells off the assets to pay the creditors, say experts.
The success of IBC, like any other law, will depend on its implementation. As it is still evolving, it needs to be seen if it can indeed deliver where earlier resolution structures failed.