The recent amendment to the bankruptcy law — that requires shareholder approval before a company files for insolvency and also mandates that the administrator convince the tribunal that the resolution plan is effectively implementable — will benefit small stakeholders but delay resolution.
Why will it cause delay?
- The President approved to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, which was cheered for bringing home loan buyers at par with financial creditors besides other changes.
- The revised Act says the corporate debtor can file insolvency commencement petition only if its shareholders pass a special resolution. This restricts access to IBC by corporate debtor which is contrary to global best practices, this will lower the country’s score on the ease of doing business.
- Besides, getting shareholder nod would be time consuming, particularly for listed companies. Adding one more layer to the process and resultant delay in insolvency process initiation by the corporate debtor – this is the price to be paid for preserving sanctity of shareholders’ rights over management of affairs of company in letter and spirit.
- Since this is a major corporate step, it is only in the fitness of things that such action be taken only after approvals by the shareholders and imparts greater transparency in such corporate actions, Bankruptcy cases against as many as 850 companies have been admitted to National Company Law Tribunal. Of this, the decision for liquidation has been passed for 100 companies and resolution is approved in another 30 cases.
- This apart, the amendment also says that before approving the resolution plan, the adjudicating authority should be satisfied that the plan has provisions for its effective implementation. “This will prompt greater scrutiny by adjudicating authority thus exposing resolution plan approvals to delays and uncertainties. “The onus to ensure that the plan can be executed effectively was on the lenders who approved it.”
- Till recently, the matter was approved based on RP’s compliance certificate. Now the RP will need to elaborate as to how the new management shall implement the plan and who shall be supervising it till it is fully implemented.
The latest ordinance has brought about a lot of changes to the IBC giving relief to small stakeholders and homebuyers but this relief has caused delays in executing the process which is defeating the very purpose of enacting this code, time bound resolution. If the stakeholders are to give their approval then it will take more time than usual to conduct the process. It is taken into consideration that a law is enacted to provide relief to the victims in the best possible manner, but if every small point is treated as a hindrance then it becomes difficult to implement the law and execute it accordingly. The people also need to cooperate with the government in successful implementation of IBC and the resolution process.
Disclaimer – The above summary is based on the personal interpretation of the revised regulations, which may differ person to person. Hence, the readers are expected to take expert opinion before placing reliance on this article.