The right reaction

The Union Cabinet has signed off on further amendments to the landmark Insolvency and Bankruptcy Code (IBC). The purpose of these amendments is to ensure that there is greater protection for successful bidders under the resolution process. In particular, they should not be subject to criminal action for offences that might have been committed by the previous management of the company or asset owner. In some recent cases, the winning bidder has explicitly sought such protection. The possibility of criminal proceedings is, after all, a major deterrence to many investors who might be interested in a stressed asset but do not want to take on the asset when there is an unknowable criminal investigation-related risk. In addition, a lack of insulation from criminal proceedings can lead to major delays in the insolvency process. But the IBC’s effectiveness depends crucially on the mechanism working at speed. Thus, it is essential that these amendments swiftly be enacted into law.

Certainly, the question of criminal investigation interfering with the bankruptcy process should have been considered before. The National Company Law Tribunal has, in fact, had to ask the Ministry of Finance and the Ministry of Corporate Affairs to sort out which two legal processes — investigation and bankruptcy — should take precedence. The context was the sale of the assets of Bhushan Power and Steel Ltd (BPSL) to JSW Steel, which was derailed by the attachment of some BPSL assets by the Enforcement Directorate (ED), which comes under the Union finance ministry. Naturally, the attachment of assets means that a significant degree of uncertainty and delay has been injected into the process. Among the stakeholders who will be hurt by this are the banks who are dependent upon the insolvency process for recovery. If promoters or the management of a company admitted under the insolvency process needs to be investigated, it should be done separately without affecting the company assets. Clearly, greater legal clarity on the process was needed, and this is what has hopefully been provided by the Cabinet’s intervention.

Once again, the government has demonstrated its intent to swiftly respond to emergent problems in the IBC process and plug loopholes. It is, of course, true that such a divergence should have been foreseen in law, and doubly true that the action of the ED should have taken into account that the IBC process was ongoing. There is something deeply wrong at the ED if it proceeds with automatic attachment of properties without sufficient application of mind. Systemic implications should be considered at a higher level than they are currently. But it is nevertheless a good sign that, as with previous changes to the IBC, the government has not let the grass grow under its feet.

It is to be hoped that the amendment will be drafted in a manner that it stands up in court. The government must continue to improve and patch the IBC norms wherever possible, and privilege the certainty and speed that are supposed to be built into the insolvency and bankruptcy process. It is, after all, the current government’s landmark financial reform and unprecedented in its way. Constant attention is needed if it is to be institutionalised, and capital markets in India are to be rendered more flexible than they are now.


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