Jaitley moves bill to amend Insolvency and Bankruptcy Code

The government on Thursday moved a bill in the Lok Sabha incorporating amendments to the Insolvency and Bankruptcy Code (IBC), to bar willful defaulters and promoters with dubious antecedents from bidding for stressed assets, by streamlining the law and plugging loopholes.

The Insolvency and Bankruptcy Code (Amendment) Bill 2017, introduced by finance minister Arun Jaitley, allows defaulting promoters to be part of the debt resolution process, provided they repay dues in a month.

The bill gives defaulting promoters a chance to bid if they are able to clear their loans within a month. It has also permitted asset reconstruction companies, alternate investment funds and banks to participate in the bidding.

This will aid promoters who had submitted resolution plans before the enactment of an ordinance that barred them from taking part in the debt resolution process of companies.

It also brings greater clarity on who are eligible for the auction of stressed assets for resolution under IBC.

According to the statement of objectives, the bill was being introduced as the original Act did not bar anyone from participating in the bidding or resolution of a company being sold off because its promoters could not pay back the loans.

"Concerns have been raised that such persons who with their misconduct contributed to the defaults of companies or otherwise undesirable may misuse this situation. This may undermine the process as the unscrupulous person would be seen to be rewarded at the expense of creditors," the bill's objectives said.

The bill has brought in the words "or in concert with" to define connected parties who may be linked to the defaulting borrowers from bidding for the stressed assets.

It made it clear that the ineligible defaulters were those who had "failed to make the payments of all the overdue amounts with interest and charges relating to non-performing asset before the submission of the resolution plan".

It, however, does not count a person's or a firm's bad loans abroad as ineligibility for bidding for the stressed assets in India.

The issue of whether former promoters of failed firms should be barred from bidding to buy back their own companies arose after the Essar Group decided to bid for Essar Steel, a firm it had run unsuccessfully and for which it had submitted a major debt restructuring in the last decade.

Also, recently, the Ruias had been unable to pay back Essar Steel's huge debt of over Rs44,000 crore, resulting in their debt being declared as bad loan and the RBI ordering banks to recover money by using the government's new bankruptcy code.

While the promoters of Essar have not been declared "willful defaulters" by the RBI, both bankers and several firms bidding for the steel-maker felt that allowing Essar to bid could cause a moral hazard.

Sanjay Bhattacharya, former managing director of the State Bank of India, said, "A moral hazard would have been created if we allow failed promoters to bid and buy back their firm at a fraction of the real price while wiping out their entire debt... this would be like rewarding a promoter for failing his firm."

"The tone and tenor of the changes will make it obligatory for the committee of creditors to take a call on the viability of a proposal taking into account the track record of a bidder," said officials.