The End Of ‘Only Sick Companies But No Sick Promoters’
Bailouts to prosperous promoters during election season would have a moral & financial cost, writes Shardul Shroff.
The need to avoid an impact on the credibility of the resolution process is the imperative behind the Ordinance effective from November 23, 2017. If persons, who are or have been promoters or persons in control or management of accounts of non-performing assets, were to be permitted to propound a resolution plan for such a corporate debtor entailing huge financial ‘haircuts’ to banks and financial institutions, public sector banks and financial creditors; then the ruling party would have to face embarrassing questions.
The morality of giving bailouts to prosperous promoters and the odium attached to such a policy decision during election season would have a moral and financial cost attached to such policies of laissez faire.
The centre piece of the Ordinance is the introduction of a new Section 29A, which disqualifies ten kinds of persons from being resolution applicants proposing a resolution plan for a corporate debtor. Undischarged insolvent persons, wilful defaulters and persons whose account is classified as a non-performing asset as per Reserve Bank of India guidelines and the Banking Regulation Act for a period of one year or more from the date of classification as NPA, when such persons have failed to make payment of all overdue amounts with interest and charges relating to the NPA before submission of the resolution plan are disqualified from filing resolutions plans for corporate debtor.
Persons convicted of any offence punishable with imprisonment for two years, disqualified directors under the Companies Act, persons prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities market are few other persons disqualified. Persons who have indulged in preferential transactions or undervalued transactions or fraudulent transaction of which an order has been made under the Insolvency and Bankruptcy Code, guarantors of an enforceable guarantee in favour of creditors in respect of a corporate debtor under insolvency resolution process or liquidation, connected persons to aforementioned kind of persons meeting similar criteria or persons having similar disabilities under any law in jurisdiction outside India are also disqualified.
In substance, those who as managers or owner promoters, have damaged or affected the viability and creditworthiness of the corporate debtor and consequently financial creditors; will not be aided through a resolution process to keep a hold over such corporate debtor or its assets.
The Ordinance has extended the IBC to personal guarantors of corporate debtors. Such guarantors will get the benefit of the moratorium under the IBC, and will be probably responsible only to the extent of the scaled-down financial debt pursuant to resolution plan; if not fully discharged as guarantors.
Simultaneously, with this extended application of the Code, guarantors who benefit by the ‘haircut’ or partial or total discharge pursuant to a resolution plan cannot be resolution applicants, so as to claim dual benefits under the IBC.
They stand disqualified as persons who can file a resolution applicant under Section 29A(h) of the Ordinance. The Ordinance applies to all pending cases of disqualified persons where their resolution plan has been filed but not approved by the Committee of Creditors. Such plans, if any, are pending shall be rejected and the resolution professional shall have to call for new resolution plans if there are no other eligible plans.
The Ordinance enables the Insolvency and Bankruptcy Board of India to frame regulations for specifying requirements of the resolution plan in aid of testing feasibility and viability of the plan for the corporate debtor. The Committee of Creditors constituted under the IBC has to consider the feasibility and viability of the resolution plan mandatorily, before voting for its approval.
Some of the other miscellaneous changes pertain to the duties of the Resolution Professional to invite only such resolution applicants who fulfill the eligibility criteria laid down by the Committee of Creditors having regard to the complexity and scale of operations of the business of the corporate debtor. There could be other conditions prescribed by the IBBI for eligibility of resolution applicants.
Summing up, the ‘mischief’ rule of interpretation for purposive legislation has been applied in making the Ordinance for disqualifying persons who have been wilful defaulters, or promoters or persons in control and management of such accounts which are non-performing assets as per RBI guidelines and the Banking Regulation Act and connected persons. The law is designed not to aid and abet persons whose antecedents are suspect and whose actions would impact the credibility of the resolution and liquidation processes.
The adage that “there are only sick companies but no sick promoters” is an adage which will cease to be true in the future.
Shardul Shroff is the executive chairman of Shardul Amarchand Mangaldas & Co.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.