New Delhi: The corporate affairs ministry has upheld the sanctity of court-approved turnaround schemes over shareholder rights of promoters, in the latest of a series of twists in the evolving regulatory regime of rescue and liquidation of failed businesses.
A clarification issued by the ministry late on Wednesday enables lenders to go ahead and find ways of rescuing a company, or realise its asset value, without interruption from hostile promoters.
Approval from shareholders of a corporate defaulter for a specific step in the turnaround plan is deemed to have been given when the plan is approved by the adjudicating authority, according to the clarification.
The guidance was necessitated as corporate decisions including stake sale or induction of new partners in usual circumstances requires the approval of the board of directors. The ministry has clarified that a restructuring plan put together by a court-appointed insolvency professional is deemed to have the consent of the board and would not breach company law.
Over the last few weeks, regulator Insolvency and Bankruptcy Board of India (IBBI) has upheld the rights of customers of a sinking firm, such as home buyers in the case of a bankrupt real estate firm, while the government took steps to create a new cadre of valuation professionals.
Recent changes in the bankruptcy regime indicate how the ministry of corporate affairs and the IBBI strive to keep pace with emerging regulatory issues, as state-owned banks saddled with about Rs10 trillion of bad loans take defaulting firms to the National Company Law Tribunal (NCLT)—either to salvage the business or to recover their capital before its value erodes too much.
The regulatory challenges that the authorities seek to address on a real-time basis include gray areas in the competing interests of lenders, promoters and customers of the failed business.
“The ecosystem of insolvency resolution is evolving fast. The government is responding rapidly to market needs. The recent clarification issued by the corporate affairs ministry and amendments in regulations are live examples. Also, the latest rules on valuation will facilitate creation of a new cadre of valuers, which will play a crucial role in the resolution system,” said Sumant Batra, managing partner of law firm Kesar Dass B. & Associates.
A bankruptcy professional appointed by court to thrash out a revival plan has to hire a valuer within a specified period. The Companies (Registered valuers and valuation) rules 2017 seek to regulate the business of valuation.
Earlier this month, IBBI amended two of its regulations to require that every turnaround scheme should also specify how the interests of stakeholders other than lenders such as employees, vendors and customers will be taken care of.