Tweaks in insolvency and bankruptcy code to block wilful defaulters

Tweaks in Insolvency and Bankruptcy Code to block wilful defaulters

Tweaks in Insolvency and Bankruptcy Code to block wilful defaulters on Business Standard.

Cabinet clears ordinance to make it difficult for many promoters to take back insolvent firms

Latest News Wilful defaulters, dubious promoters as well as those involved in fraudulent transactions would not be able to bid for companies going insolvent, with the Centre deciding to amend the Insolvency and Bankruptcy Code.

The Cabinet approved an ordinance on Wednesday. The amendments would come in force with immediate effect (after the President promulgates it), Finance and Corporate Affairs Minister Arun Jaitley said after the meeting. The ordinance was necessitated as the winter session of Parliament will begin in the middle of December, and a number of insolvency cases are coming up for bidding. Apart from adding a new section that tightens bid guidelines, the government has tweaked a few other sections in the existing Bankruptcy Code.

Wilful defaulters, responsible for nonperforming assets (NPAs) for over a year, would be prohibited from taking over an insolvent company again. Experts say it usually takes one year after an account is declared NPA to term a promoter a wilful defaulter. The one-year NPA

clause was not standard in the Reserve Bank of India’s definition. However, a senior banker said investigations and follow-ups before declaring someone a wilful defaulter usually takes more than a year. The ordinance could be formalising the timeframe, so that banks cannot arbitrarily declare someone a wilful defaulter before due process is over.

An account is termed NPA when an interest rate or instalment on the principal of a term loan is not paid for over 180 days. There are specific timeframes for non-payment of agricultural dues, overdraft, bills, etc, to term an account as bad debt. A wilful defaulter is the one who does not pay back even when he is able to do so, diverts the loan for other uses or disposes off the collateral without the knowledge of lenders. “The proposed amendment through ordinance comes at an apt time as it settles the debate about allowing or disallowing exiting promoters of companies to bid back the company with loan hair-cuts. Now, it is clear that only promoters who are wilful defaulters or who are alleged to have misappropriated funds, would be

debarred,� says Manoj Kumar, partner at Corporate Professionals, a legal firm.

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