Through an ordinance on Wednesday, the government has tried to make sure that wilful defaulters and promoters of companies in loan default over an extended period of time are not able to get their hands back on assets during the resolution process. Lawyers, however, are of the view that the ordinance will not stop incumbent promoters from buying back their companies at a discount.
The ordinance puts forth an eligibility criteria for prospective resolution applicants and a due diligence framework to enable the committee of creditors to make a proper assessment of the creditworthiness and credibility of an applicant before approving a resolution plan. It bars wilful defaulters, undischarged insolvents and disqualified directors, besides those who have engaged in preferential, undervalued or fraudulent transactions as determined by the adjudicating authority.
According to legal experts, the changes will only ensure the creditors’ committee can take a stronger view in cases referred to them. As far as the law goes, not much will change, they said. The move only nudges creditors to consider other criteria than just the highest financial bid.
As per the ordinance, wilful defaulters — who knowingly borrowed more than they could repay, or fraudulent promoters found diverting funds in forensic audits — can be weeded out from the pool of potential buyers for a company being sold by lenders to recover loans.
“It reinforces what the board (Insolvency and Bankruptcy Board of India) put out a little while ago and guides creditors to consider credibility, track record, and other clauses apart from the absolute haircut they would need to take,” said Bahram Vakil, founding partner, AZB & Partners. Vakil was one of the co-authors of the IBC.
At the moment, there is a raging debate on whether promoters can buy back their companies at discounted rates. “They will obviously be the highest bidders for their assets,” said an investor bidding for stressed companies. Recently, the Essar group became one of six bidders for Essar Steel. Earlier this year, RBI forced 12 accounts into bankruptcy including Essar. Lenders will have a hard time deciding whether to accept the bid of the highest bidder, therefore reducing their loss, or to ascertain the one most capable of running the company.
“The ordinance clarifies (to resolution professionals) what could be a moral hazard situation for bankers,” said Sunil Srivastava, deputy managing director, State Bank of India, handling bankruptcy for the country’s largest lender. “The ordinance ensures the resolution professionals appointed to run the sale process of stressed companies are also aware and responsible for this,” he added.
However, with the criteria to define a willful defaulter or fraudulent promoter remaining the same, most of the promoters remain eligible to bid for the companies. Forensic audits done on them have during the earlier corporate debt restructuring and Strategic Debt Restructuring acquitted most promoters.