‘Participation of wilful defaulters may weaken IBC’


The Lok Sabha passed the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 last Friday. However, we are likely to witness a wave of demands seeking to allow failed promoters to participate in the bidding and resolution process of their respective firms.

About IBC Bill, 2017:

  • The Corporate Affairs Ministry has asked stakeholders to share their views on these issues by January 10.
  • The IBC was enacted in 2016 to find a time-bound resolution for ailing and sick firms, while protecting the interests all stakeholders, including creditors.
  • A successful completion of the resolution process was expected to help stem the rise of bad loans in the banking system.
  • The new amendments are a part of the ordinance that was brought in last month.
  • The Bill prohibits wilful defaulters, promoters or management of the company, if it has an outstanding non-performing debt for over a year, and disqualified directors from submitting a resolution plan in case of defaults.
  • It also bars the sale of property of a defaulting firm to such persons during liquidation.
  • Under the Code, initially, existing promoters could also bid and participate in the resolution process. However, through the said ordinance, the government banned them from participating in the process.
  • This particular clause aims to prevent a backdoor entry for errant promoters to retain control of the company and reduce their debt at the same time.
  • Recently, several interested parties represented to the government seeking a removal of this ban. There is a view that by having a blanket restriction on promoters participating in the bidding process, the valuation of the company may be affected as the promoter knows the business and the company’s potential the best.
  • While restrictions were imposed to avoid misuse, they feel it should not be a blanket ban but should have safeguards.

Price discovery:

  • There is a strong case for promoters to bid for these assets to ensure maximum price discovery that only benefits all stakeholders.”
  • Not everyone agrees.
  • “Corporate defaulters got ample opportunity to resolve their debt issues under several schemes announced by the RBI.
  • The role of the IBC in the present scenario is to remove delays in the resolution process.
  • However, even if proceedings for such cases are completed within the stipulated 180 days, the recovered amount will only be a fraction of the original value of assets. So, the ‘haircut’ will be quite substantial.
  • The silver lining is, banks can recognise profits out of collections made through IBC in cases where a large portion has already been provided for.
  • Also, a vigil is still required, to prevent ‘unscrupulous promoters misusing the provisions of the IBC to retain control of their company through benami transactions’, even as substantial sacrifices will be made by banks.
  • “Bankruptcy laws are an essential part of protecting creditors’ rights.
  • They also help the markets flush away inefficient businesses and reallocate capital to efficient businesses.


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