IBC amended, President signs ordinance putting curbs on promoters

NEW DELHI | MUMBAI: President Ram Nath Kovind signed off Thursday on an ordinance amending the Insolvency and Bankruptcy Code (IBC) to help prevent defaulters from bidding for their assets in resolution proceedings and regaining control while banks were forced to swallow losses.

That would have defeated the code’s purpose — the orderly resolution of distress in the banking system, the government said. As reported by ET on November 23, the ordinance seeks to ensure that promoters do not gain backdoor entry into their companies which had failed to repay lenders. It also bars associates and personal guarantors from bidding.

That could act as a booster for global investors seeking to buy distressed assets but wary of promoter intervention. To be sure, it does provide a window of opportunity to promoters such as the Ruias of Essar Steel and the Singals of Bhushan Steel to prevent their companies from slipping out of their grasp but only if they pay up dues to lenders before resolution plans are put in place.

“If a promoter wants to take part in the resolution process, he can pay up and convert the non-performing asset to performing asset,” said a senior government functionary.

A government release said the ordinance sought to put in place safeguards to prevent ‘unscrupulous’, undesirable persons from misusing or vitiating the provisions of the code.


“The amendments aim to keep out such persons who have wilfully defaulted, are associated with non-performing assets, or are habitually non-compliant and, therefore, are likely to be a risk to successful resolution of insolvency of a company,” the statement said.

The government had to take the ordinance route as some of the big companies referred to the National Company Law Tribunal could otherwise have ended up with the original promoters. That would have led to accusations that the government didn’t do enough to prevent such a situation from arising. Among those ineligible to bid are those who have had their accounts classified as non-performing assets (NPAs) for one year or more and are unable to settle overdue amounts including interest and charges before submission of the resolution plan.

“It’s a fair and reasonable proposal with room for NPA category, but not for wilful defaulters,” said Vishal Gandhi, founder of law firm Gandhi & Associates.

“They are capturing all the related parties too, so there may not be too many bidders.”

The law will now also cover personal guarantors to the insolvent company undergoing resolution. Proprietorships will also be taken up for insolvency resolution. The amendment empowers the resolution professional in charge of the process to impose criteria in consultation with the committee of creditors (CoC) for those wanting to bid for assets, considering the complexity and scale of the bankrupt entity.

These measures are likely to encourage private investors – both domestic and global – to consider bidding for distressed assets as the fear of meddling promoters is substantially reduced.

“Foreign investors were earlier worried about intervention from promoters, but they would be comfortable now,” said Sridhar Ramachandran, founder of Dharsha Associates, which advises on corporate restructuring. “It opens up a huge opportunity... investors need not work with the promoters who brought the company to the distress state.” The ordinance also allows the committee of creditors to reject any resolution plan involving ineligible parties even if it has already been presented.