By Dr. Anup P. Shah
Chartered Accountant
Introduction
The first batch of the Insolvency and
Bankruptcy Code, 2016 (“the Code”) has been enforced with effect from 1st
December 2016 and has met with mixed success. Attention of the readers is
invited to the columns which appeared in this Feature in the months of October
and November where the Code was analysed in detail. While the Code has been
successful in transforming corporate debtors from being debtor driven to
creditor driven, at the same time there have been certain gaps which needed to
be addressed on an urgent basis.
Background for the Ordinance
One of the key concerns under the Code was
whether a promoter of a corporate debtor could be a bidder for the very same
debtor under the resolution process? There had been several instances under the
Code where promoters had bid for the very same companies which they were
earlier running. India is one of the only nations where the powers of the Board
of Directors is superseded by the resolution professional (“RP”) during
the resolution process. Further, in other nations, there is no bar on promoters
bidding for their own stressed assets.
Interestingly, the Insolvency and Bankruptcy
Board of India (“IBBI”) had in November 2017 amended the Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2017 to provide for enhanced disclosures with respect to all
corporate resolution applicants. It provided that a resolution plan shall
contain details of the resolution applicant and other connected persons to
enable the Committee of Creditors (“CoC”) to assess the credibility of
such applicant and other connected persons to take a prudent decision while
considering the resolution plan for its approval. The details to be given in the plan are as follows:
(a) identity of the applicant
and connected persons;
(b) conviction for any
offence, if any, during the preceding five years;
(c) criminal proceedings
pending, if any;
(d) disqualification, if any,
under the Companies Act, 2013, to act as a director;
(e) identification as a
wilful defaulter, if any, by any bank or financial institution or consortium
thereof in accordance with the guidelines of the RBI;
(f) debarment, if any, from
accessing to, or trading in, securities markets under any order or directions
of the SEBI; and
(g) transactions, if any,
with the corporate debtor in the preceding two years.
Thus, the IBBI put the onus on the CoC to
take an informed decision after due regard to the credibility of the bidder for
the corporate debtor. It also put a great deal of responsibility on the
shoulders of the RP.
It was in this backdrop that a burning question
cropped up – should the promoter who was in charge of the downfall in the first
place be given a second chance – and this was both a legal and an ethical
issue! While there are no easy answers to the ethical dilemma, the Government
has tried to address the first question, i.e., the legal question. It has done
so through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (“the
Ordinance”) which was promulgated by the President on 23rd November,
2017 (nearly a year after the Code was enforced). Let us examine this Ordinance
and also whether it suffers from the vices of extremity or is it a necessary
evil?
Interesting Preamble
The Ordinance states that it has been
enacted to strengthen further the insolvency resolution process since it has been
considered necessary to provide for prohibition of certain persons from
submitting a resolution plan who, on account of their antecedents, may
adversely impact the credibility of the processes under the Code. Thus, it
seeks to prohibit certain persons who have questionable antecedents as these antecedents
may adversely impact the credibility of the resolution process.
The Ordinance enlists these antecedents.
Criteria for the Resolution Applicant
The Code earlier described a resolution
applicant as any person who submits a resolution plan to the RP. Thus, he would
be the person interested in bidding for the corporate debtor or its assets. The
Ordinance now defines this term to mean a person, who individually or jointly
with any other person, submits a resolution plan to the resolution professional
pursuant to the invitation made by the RP. One of the key duties of the RP,
earlier included inviting prospective lenders, investors and other persons to
put forth resolution plans for the corporate debtor.
This duty has now been significantly
amplified by the Ordinance to provide that it would include inviting
prospective resolution applicants, who fulfil such criteria as may be laid down
by the RP with the approval of the CoC, having regard to the complexity and
scale of operations of the business of the corporate debtor and such other
conditions as may be specified by the IBBI, to submit a resolution plan.
Thus, the CoC and the RP would jointly lay
down the criteria for all resolution applicants. This criteria would be fixed
after considering the regulations issued by the IBBI in this respect and the
complexity and scale of operations of the business of the corporate debtor.
Hence, again a very onerous duty is cast on both the CoC and the RP to fix the
criteria after considering various subjective and qualitative conditions.
Ineligible Applicants
While the Ordinance seeks to formulate
certain subjective criteria for barring prospective bidders, it also lays down
objective conditions under which any person would not be eligible to submit a
resolution plan under the Code. What is interesting to note is that the bar
operates not just in respect of the plan for the corporate debtor under
question but also for any other resolution plan under the Code. Hence, there is
a total embargo on such debarred persons from acting as a resolution applicant
applying under the Code.
A person ineligible to submit a resolution
plan/act as a resolution applicant under the Code, is anyone who, whether alone
or jointly with anyone else:
(a) is an undischarged
insolvent;
(b) has been identified as a
wilful defaulter under the RBI Guidelines. The RBI’s Master Circular on Wilful
Defaulters dated 1st July 2015 states that a ‘wilful default’ would
be deemed to have occurred if any of the following events is noted:
(i) The unit has defaulted
in meeting its payment / repayment obligations to the lender even when it has
the capacity to honour the said obligations.
(ii) The unit has defaulted
in meeting its payment /repayment obligations to the lender and has not
utilised the finance from the lender for the specific purposes for which
finance was availed of but has diverted the funds for other purposes.
(iii) The unit has defaulted
in meeting its payment /repayment obligations to the lender and has siphoned
off the funds so that the funds have not been utilised for the specific purpose
for which finance was availed of, nor are the funds available with the unit in
the form of other assets.
(iv) The unit has defaulted in
meeting its payment /repayment obligations to the lender and has also disposed
off or removed the movable fixed assets or immovable property given for the
purpose of securing a term loan without the knowledge of the bank/lender.
(c) whose account is
classified as an NPA (non-performing asset) under the RBI Guidelines and a
period of 1 year or more has lapsed from the date of such classification and
who has failed to make the payment of all overdue amounts with interest thereon
and charges relating to non-performing asset before submission of the
resolution plan – this is the only case where a promoter though barred can
become eligible once again to bid. As long as the promoter makes his NPA account
a standard account by paying up all overdue amounts along with
interest/charges, he can submit a resolution plan. However, this is easier said
than done. The account became an NPA because the promoter was unable to pay up.
Now that it has become an NPA, it would be a herculean task for him to find a
financier who would lend him so that the NPA becomes a standard account!
(d) has been convicted for
any offence punishable with imprisonment
for 2 years or more – this is a very harsh condition, since any conviction for
2 years or more would disentitle the applicant. Consider the case of a person
who has been implicated in a case which is actually a civil dispute, but
converted into a criminal case of forgery and he is convicted by a lower Court
for 2 years or more. Ultimately, his case may be overturned and he may be
acquitted by a Higher Court. In the absence of an express provision, it is
possible that such a person, although acquitted, would be ineligible. Hence,
the amendment should provide that once conviction is set aside, he would again
become eligible.
(e) has been disqualified to
act as a director under the Companies Act, 2013 – this would impact several
directors who have been recently disqualified as directors u/s. 164(2) of the
Companies Act, 2013 on account of failure of the companies to file Annual
Returns and other documents. Several independent directors have also been
disqualified by virtue of the Ministry of Corporate Affair’s drive against
supposed shell companies. All such directors would also become ineligible to
submit applications.
(f) has been prohibited by
the SEBI from trading in securities or accessing the securities markets – this
embargo is quite severe. The SEBI has been known to prohibit several persons
from trading in securities or accessing the securities markets. Many of the
SEBI’s Orders in this respect have been overturned by the Securities Appellate
Tribunal. What happens in such a case?
(g) has indulged in
preferential transaction or undervalued transaction or fraudulent transaction
in respect of which an order has been made by the Adjudicating Authority under
the Code – this is to prevent promoters who have entered into fraudulent
transactions with the corporate debtor or transactions to defraud creditors.
(h) has executed an
enforceable guarantee in favour of a creditor, in respect of a corporate debtor
under the insolvency resolution process or liquidation under the Code – this
again ranks as a surprising exclusion. Merely because a person has provided a
guarantee for a company which is undergoing a corporate resolution process, he
is being penalised. Not all cases of insolvency are because of fraud or
misfeasance. Some are genuine cases because of changes in market circumstances
or spiralling of raw materials/oil prices, etc. In such cases, why
should a person who was not even in charge of the debtor be debarred. In fact,
he had provided a guarantee in favour of the creditors which could have been
enforced and some dues could be recovered. Many persons may now think twice
before standing as corporate guarantors.
(i) Is a connected person in
respect of a person who meets any of the criteria specified in clauses (a) to
(h) would also be ineligible. A connected person is defined to mean
(1) any person who is the promoter
or in management/control of the resolution applicant.
(2) any person who is the
promoter or in management/control of the business of the corporate debtor
during the implementation of the resolution plan.
(3) the
holding/subsidiary/associate company or related party of the above two persons.
The term related party is defined u/s. 5(24) of the Code and includes a long
list of 13 persons. Thus, all of these would also be disqualified if a promoter
becomes ineligible and none of these could ever submit a resolution application
for any company/LLP under the Code.
(j) has been subject to any
disability, corresponding to the above clauses under any law in a jurisdiction
outside India –thus, even if a person has acted as a guarantor for a small
foreign company which is undergoing bankruptcy proceedings abroad, then he
would be ineligible from participating in the bidding process. This is indeed a
strange provision.
A related provision is that the CoC cannot
approve a resolution plan which was submitted before the commencement of the
Ordinance in a case where the applicant became disqualified by virtue of the
amendments carried out by the Ordinance. Moreover, if no other resolution plan
is available before the CoC other than the one presented by the now
disqualified bidder, then the CoC would be required to ask the RP to invite a
fresh plan. Clearly, this is a very tough task to follow in practice. An actual
case of this nature has occurred in Gujarat NRE Coke Ltd. where, other than the
promoters, there were no other bidders and the promoters have now been
disqualified under the Ordinance. It would be interesting to see what happens
next in this case. However, it is clear that there would be several more such
cases.
Conclusion
As it is, RPs are finding it tough to get
resolution applicants. The problem is even more severe in the case of SME
corporate debtors undergoing insolvency resolution. This is now going to get
worse with a whole slate of applicants becoming disqualified by virtue of the
Ordinance. It has painted all applicants by the same brush and even their
related parties and associate companies. If one were to try and plot a tree of
disqualified bidders, one could end up with a forest! This Ordinance while
laudable in its objective of keeping out unscrupulous promoters from gaining a
backdoor re-entry, may in practice become a pain point for RPs.
Considering that the IBBI had amended its
Regulations to provide full disclosure about applicants and asked the CoC and
the RP to take more responsibility about applicants, the Ordinance may appear
excessive in its outreach. In fact, this may further lower the value which the
stressed assets could fetch! One only hopes that the Ordinance does not cause
inordinate harm to the already overburdened bad loans’ market. _
