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Editorial
Messy insolvency code
The new insolvency code can hurt some of the corporate entities but can put small borrowers to inconvenience
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The central government's promulgation of an ordinance that significantly amends the original Insolvency and Bankruptcy Code (IBC) comes in less than 12 calendar months after it first came into force with the goal of easing the resolution of corporate insolvency. The aim of the changes in the IBC is clearly stated in the preamble: "...to strengthen further the insolvency resolution process, it has been considered necessary to provide for prohibition of certain persons from submitting a resolution plan, who, on account of their antecedents, may adversely impact the credibility of the processes". The fresh and amended ordinance then specifies the categories of persons who are deemed ineligible to participate in resolving a corporate entity's debt once it has been put under the process of insolvency resolution by creditors. This is where there is a lot of confusion in meeting the challenges posed by some unscrupulous persons in the corporate world. In fact, the new law also does not specify who qualify to put forward proposals for insolvency of the units, they have the stake in. While there is no denying the fact that there is a need to specify the individuals who have become wilful defaulters putting the banks at loss for repayment of loans availed by them for the corporate houses, but there is urgency in not harassing the people, who have genuinely faced the problems owing to market conditions or change of policies. There s also the need to deny unscrupulous and wilful defaulters who have put banks and other creditors to substantial financial hardship the opportunity to regain control of corporate assets that have been put under resolution, the category of people barred is too broad and risks the very objectives of the original code. It is pertinent to remember here that the IBC is not intended to serve as a mere instrument of liquidation or resolution of the financial problems of a particular corporate house. Instead, it is to provide an enabling legal framework for the 'reorganisation and insolvency resolution of corporate persons in a time bound manner for maximisation of value of assets of such persons' and to promote entrepreneurship, among other goals. In the background of all these issues, the government and its institutions also need to segregate the people from others, who have been advanced loans under pressure from those ruling the roost in the corridors of power causing immense hardships to the public sector banks. Some of the financial institutions are under tremendous stress because some of these corporate houses have become Non-Performing Assets after having availed of loans to a large extent. The number of such corporate house is very small but their NPAs are about one-third of total NPAs in the country. Similarly, their promoters are also from the same class of people, who have thrived as crony capitalists and dependent on public sector banks for making money in the process. This is one major factor that has been ignored by the successive governments during the past many decades.

By including promoters and management entities, whose loan accounts have been classified as NPAs for one year or more, as well as any person disqualified to act as a director under the Companies Act, the amendment risks becoming an instrument of blunt force that hurts more than it helps. On many occasions, the policymakers and central banks have pointed out, not all bad loans are a result of malafide intent on the borrower's part. Specifically, in cases where companies have ended up struggling to service debt as a result of unpredictable external factors that adversely impacted their operations and financials, is unfair to both the entrepreneur and the enterprise itself. There are exceptions when the promoters of such firms from a chance to restructure and turnaround the business, merely because the loans have turned sour, should be kept in mind while formulating new policies. For instance, steel companies were among the worst hit in the wake of the global slowdown in commodity prices and depressed demand. It has been reported that the promoters of some of these debt-laden steelmakers were considering participating in bids to restructure the debt and businesses and hoping to run them again. By widening the scope and definition of those it considers ineligible to participate in the resolution process and, worse, making the amendments retrospective to cover even those cases already referred to the Company Law Tribunal, the Centre may have ended up, unintentionally, labelling all the borrowers of different hues in one category. The genuine borrowers may be put to inconvenience for no fault of theirs.


News Updated at : Friday, December 1, 2017
 
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