Mar 23, 2018

IBC amendments: No relaxing of related party rule

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A panel reviewing the Insolvency and Bankruptcy Code (IBC) is in no rush to suggest easing the related party criteria for the bidding of stressed assets, as it decides to staunchly guard against any scope for a back-door entry to dubious promoters from any such relaxation, sources told FE. The government is also considering another proposal to empower the National Company Law Tribunal (NCLT) to stop insolvency or bankruptcy proceedings once a matter is admitted with it but has not yet reached the resolution stage, upon requests by a majority of the committee of creditors. A source, however, said the panel hasn’t taken a final call on this issue, given a view that such a proposal might give errant promoters a window to evade the resolution process.

Currently, only the Supreme Court has the power to stop the insolvency proceedings once a matter is admitted with NCLT. “There are strong views both for and against the proposal (to empower NLCT),” the source added. The panel’s likely move to maintain status quo on related party has wide ramifications amid clamour for a cautious relook of the law, with some analysts saying the definition of connected persons who are barred from bidding from stressed assets is too exhaustive. The Section 29A of the IBC explicitly disallows undischarged insolvents, wilful defaulters and anyone with a non-performing account for a year or more, among others, from bidding for stressed assets. Similarly, clause (j) of Section 29A restricts the participation of those connected to a person already disqualified under the section.

It defines “connected person” (related party) as “(i) any person who is the promoter or in the management or control of the resolution applicant; or (ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or (iii) the holding company, subsidiary company, associate company or related party of a person” who is already disqualified under the provisions of the Code. The law has been made more stringent in recent months after allegations of related party transactions in some cases reinforced fears of a back-door entry of dubious promoters.

In one case, the debtor company (Synergies Dooray Automotive) transferred its debt to its sister concern (Synergies Castings), which, in turn, transferred the debt to a third party (Millennium Finance). Edelweiss ARC, the minority financial creditor of the debtor, resisted the transfer of debt from Synergies Castings to Millennium Finance on the grounds that the sole purpose of such a transfer was to dilute the voting power of Edelweiss ARC. This is because Synergies Castings, being a related party, would not otherwise have been able to vote in the committee of creditors.

More recently, the issue of related party came into focus after JSW Steel, in partnership with Aion, emerged as the lone bidder for Monnet Ispat. JSW Group chairman Sajjan Jindal’s sister has been married to Monnet Ispat’s promoter Sandeep Jajodia. The 14-member Insolvency Law Committee, set up under the corporate affairs secretary that had its last meeting on March 12, will soon submit its report with the government.

Analysts said if the government empowers NCLT immediately to stop insolvency proceedings, it could have bearing on the ongoing legal tussle involving the sale of Binani Cement, where the promoter company, backed by Ultratech Cement, wants to terminate the insolvency proceeding, even though the Dalmia Bharat-led consortium has been declared the highest bidder. In a few cases such as Uttara Foods, the Supreme Court allowed termination of insolvency proceeding on settlement with the creditor by invoking special power under Article 142 of the Constitution. But some others said the problem with making provisions for termination or closure of insolvency proceedings mid-way is that it may make the IBC a tool of recovery rather than a law for resolution of insolvency.

The panel has also decided now to tread cautiously on giving any immediate relief to promoters of micro, small and medium enterprises (MSMEs) to bid for their companies if they are not wilful defaulters. As for diluting the related parties provision, analysts say given the public uproar over the $2-billion fraud at Punjab National Bank involving jeweller Nirav Modi and the general mood against dubious promoters, the panel may have decided against offering any window that can potentially be exploited by unscrupulous elements.

Pitching for making less stringent criteria of disqualifications for applicants in case of MSMEs, Manoj Kumar, partner and head (M&A and Insolvency Resolution Services) at consultancy firm Corporate Professionals Capital, said: “In the absence of valid bids most of such smaller companies are going towards liquidation. Apparently, around 63-64 companies went into liquidation due to non-availability of valid bids, while only 15-16 are getting resolved. The liquidation is not the objective of the IBC and each case, and each case of liquidation has a lot of collateral damages- on employees, suppliers etc”

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