Insolvency ordinance that bars promoters from bidding in legal hurdle

Published On: 08, Dec 2017 | Source:

The Insolvency and Bankruptcy Code (IBC) amendment to plug a loophole in the law that allowed promoters to re-purchase their stressed assets at a discounted price through an Ordinance has been legally challenged by Punjab-based RMS Ltd in the Punjab and Haryana Court, which has issued notice to the government and has fixed the hearing in January.

Last month, the Narendra Modi government took the ordinance route to bar promoters who have defaulted on loans and interests, whose accounts have been classified as non-performing assets and wilful defaulters. The company has challenged the ordinance saying that it does not draw a line between genuine promoters and defaulters.  The Ordinance has incorporated Section 29A that makes certain persons ineligible to be a resolution applicant. It includes wilful defaulters who have their accounts classified as non-performing assets for one or more years.

According to the Ordinance, it also bars those people who are unable to settle their overdue amounts include interest and other charges relating to the account before submission of the resolution plan, and those people who have executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor have also been made ineligible to be a resolution applicant.

The Section 235A, which has been incorporated in the code, provides for punishment for contravention of the provisions where no specific penalty or punishment is provided. The punishment is fine will be between Rs 1 lakh and 2 crores.

The government said that the Ordinance was introduced with an aim to keep out wilful defaulters and people associated with non-performing assets or those who are habitually non-compliant, who pose a risk to the successful resolution of the insolvency of a company.

However, some stakeholders expressed concerns and called it a messy fix for the monstrous bad loans situation. There are three concerns regarding the amendment:  If promoters are barred from bidding, the non-promoters will bid conservatively and pressure banks for more discounts; what about a chance to small companies or units to revive their business, and what about companies genuinely hit by global-turndown and demand deficit?