The government is planning to soon promulgate an ordinance for making changes to the Insolvency and Bankruptcy Code in order to provide relief to small businesses and homebuyers, relax disqualifications under Section 29A and clarify the definition of a related party.
The changes would be based on the recommendations of a high-level law committee chaired by Injeti Srinivas, secretary in the ministry of corporate affairs.
The Union Cabinet could consider the ordinance as early as Wednesday, according to a senior government official.
The change will empower the central government to modify or exempt medium and small enterprises (MSMEs) from various provisions of the code including Section 29A, which prevents those with non-performing loans from bidding under the resolution process.
Barring wilful defaulters, Section 29A will not be applicable to resolution applicants wanting to bid for MSMEs. What this effectively means is that owners of MSMEs would now be able to bid for their own companies in the resolution process. This is being done after it was found that there were very few bidders for MSMEs and often promoters were the only ones interested.
The ordinance will also put homebuyers in the category of financial creditors as the amounts raised from them under a real estate project would count as commercial borrowings.
The ordinance will narrow the scope of disqualifications under 29A by making way for a carve-out for pure-play financial entities from being disqualified because of a non-performing asset (NPA). As part of restructuring the disqualification criteria, exemption will be made for resolution applicants holding an NPA account due to acquisition of a corporate debtor under the code for three years from the date of approval of the resolution plan by the National Company Law Tribunal.
Also, where disqualification is personal in nature, it will not result in exclusion of related parties.
A definition for related parties of individuals, which has so far not been covered in the code, will be added. Financial creditors that become related parties because of conversion of their debt into equity will not be considered as such under the law and will not suffer disqualification.
The ordinance, according to officials, will set various voting thresholds – 90% of creditors for withdrawal of applications post-admission, 66% for important decisions such as approval of resolution plans and allowing liquidation and 51% for approval of routine matters.
It will clarify that guarantors of a corporate debtor are ineligible if the guarantee has been invoked by the creditor and remains unpaid in full or in part. Besides, moratorium will not apply to the surety of guarantors to the corporate debtor.
The ordinance is expected to allow people to file resolution applications on behalf of the financial creditors as their guardians or the administrators or executors of their estates or their debenture trustees.
Representatives will be allowed to appear and vote on behalf of certain classes of creditors – exceeding a number to be specified later – at meetings of committees of creditors. This step is in favour of the homebuyers.