February 27, 2019 2:04:44 am
The government plans to make changes in the Insolvency and Bankruptcy Code (IBC) to prevent bidders from backing out of a winning bid. There have been instances where resolution applicant, after winning a bid to acquire an indebted company under the IBC, backs out citing frivolous reasons. This leads to delays and failure of the time-bound resolution process intended under the IBC. The government is likely to ask bidders to deposit certain amount of funds at the bid stage, which can be forfeited in case the winning bidder backs out, sources said. The government may also blacklist such companies and prevent them from making future bids. Such blacklisted bidders can be barred at the request for proposal stage itself.
While the changes are being discussed, the government may implement these through amendment in the law or via changes in the rules. Corporate Affairs Secretary Injeti Srinivas Tuesday said that the government will soon come out with “effective steps” to deal with instances where entities back out after making frivolous bids.
“In some cases after one year or more after settlement has taken place, the resolution applicant has failed to implement the plan. What do we do with such resolution applicants? So much of time and resources (are) used in bringing in a settlement and the insolvency costs (are) huge,” he said at a conference on ‘IBC Roadmap for Effective Resolutions’ organised by industry body CII.
In such cases, he asked whether the resolution applicant has to bear the entire resolution cost or should there be some criminal proceedings or should they be banned from becoming resolution applicants again. “These are all questions and there have to be a definitive answer. This is one area I think the government is very much focused on and would soon bring some sort of effective steps to see how we discourage people from making frivolous sort of bids and then backing out,” Srinivas said.
While noting that the Code has brought in major shift in the relationship between creditors and debtors, Srinivas said it has also been subject to lot of litigation. The government is working proactively towards making the Code more effective by introducing much needed provisions for group insolvency, cross border insolvency and pre-packaged arrangement, he said. The pre-package arrangement of UK allows for out of court settlement of cases if 90 per cent of the creditors provide consent.
A hallmark of the IBC was that resolution should be done within 180 days and a grace period of 90-days could be accorded, bringing the maximum time to 270 days. This was inserted to bring in urgency in the process of resolving Rs 11 lakh crore worth of stressed loans. However, at December-end, out of the 898 cases that were undergoing resolution under NCLT benches, 275 cases were going on for more than 270 days while another 166 cases were on for more than 180 days.
This means nearly 49.10 per cent of cases over shot the 180-day deadline while 30.62 per cent of cases crossed the 270-days deadline at December-end, as per the latest available data sourced from the Insolvency and Bankruptcy Board of India.
In several cases, where successful resolution plan was approved, winning applicants did not make payments as committed, leading to failure of resolution. For instance, Liberty House, the successful bidder for taking over Amtek Auto, could not make committed payments to acquire the bankrupt firm. Of the cases, which underwent successful resolution under the IBC, the financial creditors could recover a total of Rs 65,753.23 crore out of their total claims of Rs 1,35,859 crore — resulting in a recovery rate of 48.39 per cent under the IBC at December-end, much higher than what banks were recovering through normal channels such as Debt Recovery Tribunals.
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