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Journalism of Courage
The Union Cabinet on Wednesday approved an Ordinance to amend the bankruptcy law, aimed at protecting the interests of homebuyers and enabling smooth resolution of stressed companies. Sources said the changes will put homebuyers on par with banks and financial creditors during insolvency proceedings, protecting their right to get back funds in the event of liquidation of a company. The changes have also been made in the way committee of creditors approve a proposal for resolution, while promoters of Micro Small and Medium Enterprises have been given relaxation in bidding for their own companies.
A 14-member Insolvency Law Committee had made suggestions to the Ministry of Corporate Affairs, suggesting, among others, that home buyers should be treated as financial creditors, which will allow them to equitably participate in an insolvency resolution process. The government has also reduced the minimum voting threshold required to approve resolution application of the bidders. In critical cases, a minimum voting share of 66 per cent of the creditors will be required for approval of resolution, down from 75 per cent at present. In route cases, the Committee of Creditors will be able to approve a proposal with 51 per cent voting share, in contrast to 75 per cent at present.
Sources said after the changes, promoters of MSMEs will be able to bid for their companies undergoing resolution as they will be exempted from restrictions imposed by Section 29A of the IBC. This exemption, however, will not be available to wilful defaulters, who will be barred from bidding for their own companies. Section 29A bars a number of entities from bidding for companies being put out for resolution including — wilful defaulters, un-discharged insolvent, persons banned from trading in securities market, and an account classified as NPA for more than one year and failing to pay overdue amount before submission of the bids. This effectively results in existing defaulting promoters being completely banned from bidding for companies undergoing resolution.
With the exemption to MSMEs, the resolution is expected to be easier. Unlike in the case of large companies, it’s bit difficult to attract resolution applicants in the case of MSMEs. So a relaxation is being made to ensure that small companies are not headed towards liquidation because of the limitations imposed by the law on existing promoters, the sources said. A total of Rs 4 lakh crore worth of stressed assets are currently undergoing resolution under the IBC. The first large case of Bhushan Steel has already been successfully resolved but many more cases are still hanging fire, with legal challenges potential disruptors.
