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Insolvency code review: Exclusion of errant promoters to stay : 13-03-2018

A committee examining whether the 21-month-old Insolvency and Bankruptcy Code (IBC) need more changes — it has been amended twice already — to improve the recovery rates of stressed assets is learnt to have resolved not to explicitly dilute the criteria that bar wilful defaulters and errant promoters from bidding for their own and other collapsed companies at auction till they clear their dues. However, the committee, which met here for several hours on Monday, has finalised certain changes in the code, including a few to address the “glaring discrepancies”in Section 29 (A) that defines the exclusion criteria. It could, in all likelihood, address the perceived overreach in defining parties related or connected to the errant promoter, a move that could help resolution of many cases, including that of Essar Steel. Related parties are also prohibited from submitting resolution plan for the firm concerned. According to official sources, the committee is favourably inclined to address the issue of home-buyers (owners of undelivered properties), who currently find themselves virtually nowhere when it comes to laying their hands on the assets of real estate companies in insolvency resolution process. Also likely is a trimming of the share of votes required for approving a resolution plan by the committee of creditors from 75% to 60% or thereabouts so that the process get initiated more easily.

The government and the Insolvency and Bankruptcy Board of India had earlier discussed granting home-buyers the status of financial or operational creditors, but all that they have done for them — who also have statutory and vested rights as consumers — is to come out with a new form for stakeholders like them, who do not fall under the categories of financial/operational creditors. Given that the Supreme Court had recognised the loophole in the Jaypee Infratech case and initiated recovery for home-buyers of Unitech and Supertech through the creation and maintenance of a designated website, the committee, headed by corporate affairs secretary Injeti Srinivas, could grant home-buyers the status of operational creditors who are usually not secured creditors, sources said. However, Srinivas told media persons just that “homebuyers’ demands are indeed being looked into… That has been deliberated.” The official added that certain broader anomalies with regard to Section 29 (A) would be addressed too, but refused to elaborate. “The panel will finalise the report in 10 days or so,” another source privy to the deliberations said.

FE had reported earlier that the one option being considered by the panel is to create a special window for facilitating promoters of MSMEs to bid for their stressed assets even without clearing dues if they are not wilful defaulters. The latest move comes amid realisation that MSMEs are mostly driven by promoters, who are the ones that are interested in bidding for their stressed firms in an insolvency resolution process. Since there is hardly any third-party interest in a stressed MSME, unlike large companies, almost all of them are set to go for liquidation rather than revival under the code, which forces lenders and other stakeholders to take huge haircuts. In cases of companies that went into liquidation under the code, the liquidation value was rather low, even less than 10% of the total debt in some cases. In November last year, the government disallowed wilful defaulters and dubious promoters from submitting insolvency resolution plans. It also barred those whose accounts have been classified as non-performing assets for at least a year. However, such defaulting promoters can bid for their companies only after they clear the overdue amounts with interests and other charges. The government also restricted the participation of those related to or connected to promoters in some way or the other in the resolution process.

Source : Financial Express