Easing the load: Cabinet clears ordinance for changes to the bankruptcy code

The Union Cabinet on Wednesday approved an ordinance amending the Insolvency and Bankruptcy Code (IBC). This follows suggestions made by a 14-member Insolvency Law Committee, submitted to the government in March. The changes will need to be ratified by the President. The panel was headed by Injeti Srinivas, secretary, corporate affairs ministry. The changes to the IBC are likely to be effective prospectively and to affect companies for which resolution plans are yet to be submitted. One amendment that will help lenders enormously is if promoters of micro, small and medium enterprises (MSMEs) who are not classified as wilful defaulters are allowed to bid for their companies. Currently, they are barred from doing so under the ambit of Section 29(A). However, so far there has been limited interest in these units and, consequently, bankers are staring at a spate of liquidation that would fetch them very little. Making the promoters eligible to bid for their companies would help bankers recover a bigger share of their dues. Currently, the recognised non-performing assets of the MSME borrowers is a staggering `77,000 crore, according to data from TransUnion Cibil. However, the committee had recommended that MSME promoters who have been classified as wilful defaulters should not be eligible to bid. Other amendments that could be made to the code include allowing home-buyers to be treated as financial creditors and giving them a bigger say in the resolution process. The corporate affairs ministry has been keen to provide home-buyers the status of financial creditors. Moreover, the committee had suggested the voting threshold for the committee of creditors may be lowered to 66% from the current level of 75% The panel has also recommended that both promoters of companies admitted by the National Company Law Tribunal (NCLT) and lenders be allowed to withdraw from the process provided 90% of the creditors agree. A key change would be a narrowing of the exclusion criteria under Section 29A to accommodate pure-play financial entities. Prior to the amendment, some asset reconstruction companies (ARCs), alternate investment funds (AIFs) and overseas financial institutions were considered be This would widen the pool of buyers for a distressed asset. The term financial entities is expected to be better defined so as to enable players such as ARCs and AIFs to also bid for distressed assets even if they have invested in a defaulting entity. The relief, however, may not be provided to financial entities if they are related to the corporate debtor.