Insolvency code amendment on cards to ensure NCLT-approved plans are obeyed

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The government plans to bar the successful bidder in a resolution process from any future bidding if it does not implement a scheme approved by the National Company Law Tribunal (NCLT).

In this connection, the much-discussed Section 29A of the Insolvency and Bankruptcy Code would be amended, said sources in the know.

“Dishonouring an NCLT-approved plan would be made one of the disqualification criteria under 29A,” a government source said.

He said the regulations had already been changed to enable forfeiture of the earnest money deposit if an approved resolution plan is not implemented by the bidder.

Nilesh Sharma, senior partner with Dhir and Dhir Associates, said: “If amendments are made to disqualify wilful defaulters from making resolution plans in future for some period of time, it will also help in blocking those with ulterior motives from participating in the insolvency process.”

There have been cases of a successful bidder refusing to infuse capital despite NCLT approving the resolution plan in this regard. For instance, Liberty House has allegedly refused to implement the plan in Amtek Auto’s case. Amtek Auto was referred to the NCLT after the company defaulted on Rs 12,000 crore of loans. Liberty House was declared the successful resolution applicant for the company in July 2018, with a winning bid of close to Rs 4,000 crore.

The committee of creditors had filed an application with the Chandigarh bench of the NCLT to invoke Section 74 (3) of the IBC. This says officials of a successful resolution applicant can be imprisoned for one to five years and fined Rs 1 lakh to Rs 1 crore if they violate terms of a plan approved by the adjudicating authority.

Beside Amtek Auto, successful bidders allegedly backed out after NCLT approved schemes of resolution in Orchid Pharma and Adhunik Steel.

Experts are divided on whether the provisions of Section 74 (3) are too stringent or necessary. Some say it is required to protect the Code from being taken lightly and to ensure a resolution happens as planned. If the resolution applicant wants any modification, he should approach the adjudicating authority instead of refusing to pay, according to these experts.

Some others, however, believe the possibility of this provision being invoked could deter entities from bidding.

Code correction
  • Key amendments made to the Insolvency and Bankruptcy Code so far to streamline the resolution process
  • Section 29 (A) introduced to debar errant promoters and related parties from placing resolution plans
  • Financial institutions owning equity but unrelated to promoters allowed
  • New rule provided for approval of only 66 per cent of creditors to go to NCLT
  • Homebuyers given creditor status
  • MSME promoters allowed to bid for their companies

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