Oct 7, 2017

Bankrupt firms can’t ignore employees, customers in revival plans

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Bankrupt businesses exploring turnaround options under pressure from lenders can no longer ignore the interests of their employees, vendors and customers, which in the case of real estate firms would include homebuyers, according to the latest rule changes announced on Friday.

The Insolvency and Bankruptcy Board of India, which oversees the revival and liquidation of distressed firms, amended two of its regulations to require that every turnaround scheme should also specify how the interests of these stakeholders will be taken care of.

“A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor,” said a statement by the ministry of corporate affairs .

The amendment incorporates the spirit of the Supreme Court’s order last month asking the insolvency professional managing real estate firm Jaypee Infratech Ltd to prepare and submit an interim revival plan that takes into account the interests of homebuyers within 45 days.

The amendment is significant as a turnaround scheme could include significant steps such as management change, lenders converting their loans to equity or sale of assets, which could impact interests of stakeholders other than lenders.

“It is an excellent move and plugs a gaping hole in the corporate insolvency resolution process,” said Sumant Batra, managing partner of law firm Kesar Dass B. & Associates.

Experts said the amendments will also cover public shareholders in the case of a listed company. If lenders convert their loans to equity, the public shareholding in such companies will be diluted.

The requirement to make a disclosure regarding how these stakeholders’ interests are dealt with is likely to put pressure on lenders, promoters and the resolution professional to ensure that the steps proposed are justified.

“By default, resolution plans would take care of financial and operating creditors but by making this amendment, the regulator wants that the turnaround scheme should also provide how it has treated other stakeholders such as customers, as in case of homebuyers or the investors of a listed company. This amendment is desirable as the interest of other stakeholders including the corporate debtor itself, is also important and should not be ignored outrightly,” said Manoj Kumar, partner at law firm Corporate Professionals.

The amended rules are Insolvency Resolution Process for Corporate Persons Regulations, 2016, and Fast Track Insolvency Resolution Process for Corporate Persons Regulations, 2017, said the statement. The amended regulations are yet to be published.

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