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BW Businessworld

IBC Needs Amendments, Not Postponement

The need of the hour is a series of quick amendments in the IBC so that stressed enterprises can take this route for an orderly resolution.

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In the wake of the second wave of the pandemic, certain segments of the industry are demanding a postponement of the Insolvency & Bankruptcy Code (IBC) by another one year. However, that is unlikely to help the stressed enterprises to recover quickly as they are more likely to face multiple litigations from financial and operational creditors. The IBC provides the protection from such litigations. Many of these stressed borrowers do not even have the wherewithal to handle such complications.  

The need of the hour is a series of quick amendments in the IBC so that stressed enterprises can take this route for an orderly resolution.

(A) Rescinding Sec. 29A of IBC

Section 29A disallows the promoters of stressed non-MSME companies from bidding for their company during the resolution process. This section should be only applicable only in cases where perpetration of fraud by promoters has been established. 

Why Sec. 29A should be rescinded:

  • In cases where the promoters have been victims of circumstances beyond their control, there should be no reason to block them from bidding for their own companies during the resolution process.
  • With no clarity on when the pandemic will end, companies across the board are stretched and most are conserving their resources to deal with further uncertainties. Therefore, there is not enough capacity in the market to enable a successful bidding for a stressed company. In this backdrop, expecting a change in management under Sec. 29A is impractical. However, some foreign funds and companies are trying to take advantage of the situation by acquiring some of these home-grown assets and enterprises at rock-bottom prices. As a result, ventures started by domestic entrepreneurs are ending up in foreign possession. Therefore, it makes more sense to allow the promoters to bid for their companies.

(B) Introduction of Pre-packs

Pre-Packaged Insolvency Resolution Process should be introduced quickly as the “pre-pack” scheme will be a pre-IBC window for resolution of troubled assets, which will only complement the existing framework and not substitute it. As experienced in other jurisdictions, the pre-packs get disposed of in a speedy manner and the total cost involved is also substantially less, thus preserving the value of the business.

Ministry of Corporate Affairs has already circulated a draft paper on pre-packs and invited comments. The paper mentions "current promoters and management usually have the first right or exclusive right to buy the business of the corporate debtor or submit a reorganization plan", which directly contradicts Sec. 29A of IBC. Therefore, if Sec. 29A is not amended, it would neutralize the efficacy of pre-packs to a large extent. Pre-packs should be rolled out only once the necessary amendment is carried out in Sec. 29A of IBC. Unlike a purely private restructuring process, pre-packs operate within the fold of the statutory scheme. Thus, the final outcome is binding on all stakeholders. 

However, this calls for urgent capacity creation at the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) levels. The focus should be on:

  • setting up dedicated benches of the NCLT can help speed up corporate insolvency cases
  • providing binding guidelines to Committees of Creditors as well as Resolution Professionals would prompt them to work in a time-bound manner
  • creating awareness about the commercial impact of judgments delivered and the economic implications from delays in resolution can vastly improve the role of judiciary

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
NCLT NCLAT Insolvency & Bankruptcy Code

Sunil Kanoria

The author is Ex-president, ASSOCHAM

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