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Home-buyers can trip up the entire IBC process PDF Print E-mail
Monday, 11 June 2018 04:04
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Shobhana edit

As this paper has argued, giving home-buyers the status of financial creditors won’t really help their cause much; on the contrary, it could muddy the resolution process if stakeholders pull in different directions. The decision to empower them to initiate the corporate insolvency resolution process (CIRP) against builders could queer the pitch for other financial creditors with cases being stuck in the courts; it is somewhat populist coming as it does a year ahead of the elections.

Otherwise, the Ordinance promulgated to amend some of the rules of the Insolvency and Bankruptcy Code (IBC) has gone a long way in ensuring it won’t be easy for unscrupulous promoters to get back their companies without paying off all the dues. Indeed, the government needs to be congratulated for having the political will to fight crony capitalism and for not shying away from taking tough decisions. It must be credited for persevering with changes to the IBC which came into effect in 2016.

 

The second set of changes, based on the recommendations of a 14-member panel, should make the law more fair and effective. It is, for instance, an excellent idea to tighten the definition of ‘related party’ by bringing all close ‘relatives’ within the definition. The laundry list put out is exhaustive, which is how it should be, given how wilful defaulters are trying to win back their companies using their kith and kin.

Even as it has sought to plug loopholes, the government has been pragmatic enough to realise that a larger number of investors will make the process and price-discovery more efficient. Given how pure play financial entities have the ability to invest large sums to help revive sick companies, it was important they be allowed to participate in the buying process.

The law now allows this. Moreover, the panel has pointed out a cookie-cutter approach could be destructive, and the amended law now allows promoters of smaller businesses—MSMEs—to bid for their companies. It does create a moral hazard and could encourage fraud, but, the hard truth is that in the absence of buyers, most of these businesses would be headed for liquidation, destroying assets and jeopardising thousands of jobs. One can only hope bankers will lend more wisely in the future.

In a change that would democratise the process, a special resolution would be needed if the corporate debtor triggers insolvency resolution. This rule has probably been put in place to prevent fraud. Also, an applicant who has initiated insolvency proceedings against a company can now withdraw the case even if it has already been admitted under IBC, provided 90% of the Committee of Creditors agrees. This seems a fair proposition, and the provision will come in handy if there are frivolous applications.

However, the application would need to be withdrawn before the Expressions of Interest (EoIs) for the distressed company have been invited, which again is fair. One very important change that will remove arbitrariness is that late bids will not be entertained; a couple of NCLT benches have allowed late bids, which is patently unfair because the terms and conditions of the early bids become known by the time others put in their offers. Lowering the voting threshold for creditors to 66% from 75% is also a pragmatic move, else, a handful of lenders can choose to disrupt the process.

 

 

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