Ordinance to keep out wilful defaulters from buying own cos

The Centre on Wednesday approved the promulgation of an ordinance for making changes to the Insolvency and Bankruptcy Code to prevent wilful defaulters from buying back their stressed assets through the backdoor.

The ordinance is expected to get Presidential Assent by Wednesday night in order to become effective from Thursday.

The Code that came into effect from December last year, allows a market-determined and time-bound insolvency resolution process under the eyes of the Corporate Affairs Ministry.

But, instances of the possibility of promoters wresting back control of a company under the insolvency process have worried banks. These banks had urged the government to fix the criteria for promoters who want to bid for taking a company that has declared itself insolvent.

The Cabinet is understood to have approved changes in the law for prescribing eligibility criteria with respect to prospective "Resolution Applicants", who will be allowed to bid for those companies.

A new section will be incorporated into the Code which would, inter alia, include proscribe "wilful defaulter, undischarged insolvent, disqualified director, a person who has indulged in preferential transaction or under-valued transaction or fraudulent transaction" as determined by the Adjudicating Authority.

It will also keep out a person who is a promoter or in the management or control of such persons whose account is classified as non-performing assets beyond a prescribed duration.

There will also a due diligence framework enabling the Committee of Creditors to make proper assessment of the creditworthiness, credibility and other relevant parameters of the applicant as may be prescribed by the Insolvency and Bankruptcy Board before approving a resolution plan.

The Cabinet took the view that it is necessary to ensure that promotors of the corporate debtors who are found to have contributed to the default need to be prevented from regaining control of the company through backdoor entry in the garb of a resolution applicant.

Currently, there is no bar in the law to check promoters to bid and regain control of companies facing insolvency proceedings. There is urgency for an ordinance as bids for 12 distressed companies are due for examination in January, which marks the end of the six-month window allowed to find a debt recast plan.

The Insolvency and Bankruptcy Code, 2016, provides for time-bound "Insolvency Resolution" to release assets locked up in NPAs and promote maximisation of value of assets, failing which, underutilised resources of unviable business are released through liquidation.

"Some changes are proposed to the Insolvency and Bankruptcy Code. The details of the ordinance will be given out later," Finance Minister Arun Jaitley said on Wednesday, after the Cabinet meeting.