The rules will subject promoters proposing turnaround plans for their companies to stringent creditworthiness and credibility tests.
The Insolvency and Bankruptcy Board of India (IBBI) has introduced new rules that will subject promoters proposing turnaround plans for their companies to stringent creditworthiness and credibility tests. The test will also be applicable to any other party submitting a rescue plan for such companies.
The turnaround professional appointed to put together a viable revival plan for a company must specify details regarding the background of the promoter or any other party proposing a revival scheme. These include any convictions, disqualifications, criminal proceedings, categorisation as wilful defaulter and any debarment by the capital markets regulator. The details should also include any transaction with the defaulting company in the previous two years.
“The latest amendment in insolvency regulations only reminds the committee of creditors and the resolution professional of their duty that they should take a considered and informed decision about the resolution plan taking into account the credibility and track record of the resolution applicant so that the assets/company goes into credible hands,” said Sumant Batra, managing partner of law firm Kesar Dass B. and Associates.
Under the Insolvency and Bankruptcy Code, debtors and creditors are supposed to agree to either revive the firm or liquidate it in a time-bound manner. According to R.Subramaniakumar, managing director and chief executive of Indian Overseas Bank, these steps will ensure the system is not taken advantage of by people who are seeking a backdoor entry. “The system is evolving and the speed at which changes are being taken will ensure all timelines for resolution are met,” said Subramaniakumar.
The IBBI statement said that the changes in regulations—IBBI (Insolvency Resolution Process for Corporate Persons) Resolution Process, 2016—mandate that resolution applicants, including promoters, are put to a stringent test with respect to their creditworthiness and credibility. “Further, it also imposes greater responsibility on the resolution professional and committee of creditors in discharging their duties,” said the statement.
In June, Reserve Bank of India identified 12 accounts, making up 25% of gross bad loans in the system worth Rs7.7 trillion (excluding restructured loans) for immediate bankruptcy proceedings.
Industry experts have expressed concern over promoters of defaulting companies trying to regain control of these entities. This is because banks feared that promoters re-gaining control of a firm may raise doubts on the credibility of the process.
On Monday, Rajnish Kumar, chairman of State Bank of India, said it is within the legal rights of promoters to submit resolution bids subject to the condition that there has been no wrongdoing in terms of wilful default or a fraud.