Bankruptcy norms on corp debt personal guarantors


Cogencis, Wednesday, Jul 31

By Tushar Chakrabarty and Sagar Sen

NEW DELHI – The government is ready with bankruptcy norms for personal guarantors to corporate debtors and the framework will be announced soon, Insolvency and Bankruptcy Board of India Chairperson M.S. Sahoo said.

"The rules and regulations are ready and it can be expected anytime soon," Sahoo told Cogencis in an interview.


"The first category (for bankruptcy rules) is personal guarantors to corporate debtor. I don't think any tweaking is required for that. Work is yet to begin for two other categories, namely, proprietorship and partnership firms and other individuals," Sahoo said.

The government is also planning relief in bankruptcy rules for small borrowers. In cases where the cost of recovering the debt is higher than the debt itself, the government is mulling a "fresh start process" that entails waiving-off the loan, Sahoo said.

The recent amendments made to the Insolvency and Bankruptcy Code reflect the "steely intent of the government" to address the emerging concerns in the insolvency law, he said.

On Monday, the Rajya Sabha passed The Insolvency and Bankruptcy Code (Amendment) Bill 2019. The proposed changes include a provision to give financial lenders the power to decide how a bid amount for a company undergoing insolvency is distributed.

Below are the edited excerpts of Sahoo's interview:

Q. What are the key takeaways of the new amendments to the IBC which was cleared by Rajya Sabha earlier this week?

A. The key takeaway is the steely intent of government to address the emerging concerns and letting the IBC fast approach perfection. The Bill aims to address seven-eight concerns. Many of these are clarifications and explanations and not really substantive amendments.

For example, the law originally defined the resolution plan to mean a plan which addresses insolvency resolution of a corporate debtor as a 'going concern'. This gave an impression that the company must continue to exist as a going concern through resolution plan. The Bill makes explicit what was implicit so far and clarifies that a resolution plan may provide for restructuring of the corporate debtors, including by way of merger, amalgamation, and demerger.

The Code empowers the committee of creditors to decide to liquidate a company at any time after commencement of corporate insolvency resolution process. In the World Bank ease of doing business, they value a framework more if it allows stakeholders to initiate liquidation process directly without going through corporate insolvency resolution process. We don't agree with World Bank, to avoid the possibility of a viable company getting liquidated. We follow a process to form a decision for liquidation. We would like a decision for liquidation be taken by the committee of creditors.

However, there has been some hesitation on the part of adjudicating authority to allow liquidation, without running the entire corporate insolvency resolution process. Running the entire process may be an empty formality in certain cases. The Bill (now) clarifies that committee of creditors may decide to liquidate a company at any time during corporate insolvency resolution process, even before preparation of the information memorandum.

Q. When can we expect the personal insolvency framework to be finalised?

A. The rules and regulations are ready and it can be expected anytime soon. Individuals have been divided into three categories. The first category is personal guarantors to corporate debtor. I don't think any tweaking is required for that. Work is yet to begin for two other categories, namely, proprietorship and partnership firms and other individuals.

There are three kinds of processes --fresh start process, insolvency process and bankruptcy process. The fresh start process applies to those borrowers who have annual income of less than 60,000 rupees, assets less than 20,000 rupees, debt less than 35,000 rupees and do not have a dwelling unit. They may not be to afford a court-driven process, more so when the nearest court is 300 km away from the place where he or she is living. Can there be a better option? In the UK, there is something called a debt relief order. That covers this kind of people and provides a process to waive the debt. The cost of dealing with such debt is higher than the one which one may recover. But, follow a process so that this is not misused and keep records. Fresh start process is as good as that.

Under insolvency process, a repayment plan is worked out. In bankruptcy process, the assets are sold and the dues are settled.

Q. Do you see the 330-day deadline expediting the resolution process in cases where progress has been slow? How hopeful are you of the lenders, committee of creditors and the resolution professionals actually sticking to this new deadline?

A. I am hopeful. There is a concerted effort to realise the hope. One after another, legal issues are getting sorted out. The Supreme Court has brought finality to several issues. This Bill closes the issue relating the domain of the committee of creditors and brings finality to dues payable to the government. The number of unresolved issues is narrowing.

Also, about 30 members have joined National Company Law Tribunal recently. They have been given training before they start work. Insolvency and Bankruptcy Board of India is having training programmes for committee of creditors members and for insolvency professionals. Further, the stakeholders know the consequence non-closure of corporate insolvency resolution process within 330 days. It should work, given the steely intent of government.

Q. Some banks have reported fraud from Bhushan Power and Steel account. Will it impact the resolution process of the company?

A. I have no specific information about the company. Generally, it should not impact at all for two reasons. One is very explicit in this bill that the resolution plan once approved is binding on Central government, state governments and local authorities as regards their dues. Second, crimes are individual misdeeds, not of a company which does not have a mind of its own. Criminal proceedings are proceeded against an individual who commits a crime with mens rea. So the successful resolution applicant would not be hauled up for the criminal activity of the previous management. But I don't rule out the possibility of the resolution applicant having some botheration in the sense that it may have to provide records at its custody to the concerned authority.

Q. Under the Jun 7 circular it has become optional for banks to refer cases for resolution under IBC. Do you think this will impact the number of cases being referred under the Code?

A. Please note that it is not the intention that the stakeholders must use the IBC at the first instance. It should be last resort because the IBC process is strenuous. One should use other options of resolution available to him before using IBC. What is important is not what happens under IBC. What happens on account of IBC is very important.

Reportedly, over 6,000 applications have been withdrawn before admission. This only indicates resolutions were arrived at by the parties. If they can find out a solution outside, it is well and good. IBC in fact works even when parties avoid using it.

Please note that about 50% of corporate insolvency resolution processes have been initiated by the operational creditors. Balance 50% by financial creditors and corporate debtors together.  Further, banks know what is in their interest; when to use IBC and when not use. I do not think, they need any direction for using IBC. The new circular incentivises use of IBC in terms of lower provisioning.

Q. Is there a need to balance the interests of the financial creditors and the operational creditors in distributing the proceeds from the resolution plan?

A. The objective of insolvency law is not to alter the pre-insolvency rights. The Bill settles the issue. It makes clear that the committee of creditors may approve a resolution plan after considering its feasibility and viability, and the manner of distribution of realisation under the plan, keeping in view priority of the creditors and their security interests.

Q. Is there a need for alternative debt resolution mechanisms from RBI, apart from IBC?

A. Strictly speaking, there is no need for a framework. Any creditor can arrive at a resolution plan in consultation with the debtor. RBI has given some framework. Beyond that IBC is there. And there are other mechanisms like Debt Recovery Tribunal and Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, if a bank is interested in recovery.  End

Edited by Arshad Hussain

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