Insolvency Bill eases rules for SME promoters

Representative Image
A Bill to replace an ordinance amending the Insolvency and Bankruptcy Code offers promoters of small and medium enterprises (SMEs) undergoing insolvency proceedings a month's window to repay overdue loans. and bid for their companies. This will be applicable where these promoters are sole bidders.

The Bill, introduced in the Lok Sabha on Thursday, also seeks to give some relief to promoters in general, by tweaking the definition of one year of non-performing assets (NPAs), on the basis of which they are disqualified to bid for their companies.

It also excludes asset reconstruction companies, alternative investment funds and banks from the definition of connected persons, protecting these entities from becoming ineligible for bidding. The Bill also tweaks the language of the Ordinance to bar promoters or those in the management or control of companies with over a year of NPAs from bidding. It broadens the definition of those barred from bidding.

It proposes a 30-day grace period for promoters who had bid for companies undergoing insolvency proceedings before the ordinance was promulgated on November 23, barring them from doing so, according to officials in the corporate affairs ministry. Promoters of only SMEs had bid for their companies undergoing insolvency proceedings before the ordinance took effect.

With the ordinance, it was expected that 70 per cent of SMEs would be pushed into liquidation. While providing for 30 more days, the Bill seeks to retain the period of insolvency to 180 days, extendable by another 90 days.

The Bill also proposes to relax the norm for disqualifying a promoter from bidding for a company undergoing insolvency resolution. The ordinance barred promoters whose companies have had their loans declared NPAs by banks for over a year from bidding for these. The year is counted from declaration of a loan as an NPA till the invitation of bids. The Bill proposes to calculate this period of one year till an application of insolvency is accepted by the National Company Law Tribunal (NCLT).

So, some of those promoters who were not able to bid for companies since the one-year period was over could qualify, as that period might not be complete when NCLT admitted the case.

The Bill also proposes to relax the norms for corporate guarantors. Explaining this, Manoj Kumar, an insolvency professional, says the code bars any person who has furnished a guarantee to a company undergoing insolvency proceedings from bidding for all such companies. The Bill proposes the disqualification be limited to the company for which the guarantee was provided. And, only if the guarantee was made in favour of the applicant who moved the NCLT against the company concerned.

The Bill seeks to make some provisions of the ordinance effective retrospectively. It proposes the committee of creditors must invite new bids if the promoters who had bid for companies undergoing insolvency resolution are disqualified by the ordinance.

Companies apart from the 12 big ones that are undergoing insolvency resolution have cumulative debt of Rs 150,000 crore. The 12 big cases have cumulative debt of around Rs 250,000 crore. A little over 300 companies are undergoing insolvency proceedings.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel