On 6 June, President Ram Nath Kovind passed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. Since then, the impact of the ordinance on homebuyers has grabbed the limelight. However, the ordinance is not just about improving their lot. It introduces a few other changes as well—changes that may be small from an outsider’s perspective, but could have a significant impact on the acquisition of distressed business assets.
First up, a nod to serial acquirers under the Insolvency and Bankruptcy Code (IBC)—previously, any person who held a non-performing asset (NPA) for a period of one year, or more, could not participate in an IBC proceeding as a potential acquirer, whether the NPA was acquired under the IBC or not. However, post the ordinance, if a person acquires an NPA under the IBC, a three-year breather (from the date of approval of the resolution plan) has been given, wherein such a person can continue to act as an acquirer in other IBC proceedings, even if the NPA subsists. The change allows acquirers who happened to receive an NPA under an IBC proceeding to continue acquiring other distressed business assets under IBC. Next, removing conflicts with other laws. Previously, there was uncertainty over whether the resolution plan for an acquisition under the IBC would supersede the requirements of other laws. For instance, where the acquisition under the IBC involved corporate actions in the form of shareholder approvals for issuance of new shares to the acquirer, there was ambiguity as to whether the National Company Law Tribunal’s (NCLT’s) approval for such action would supersede the requirement of a special resolution of shareholders (as is necessary under the Companies Act, 2013).
While this issue was partially resolved by a circular issued by the ministry of corporate affairs in October 2017, the ordinance has clarified this aspect by providing that shareholders’ approval for acts that are necessary for the implementation of the resolution plan is deemed to have been given, if so required, under any other law for the time being in force upon receipt of NCLT’s approval. This change seems to have been made to expedite matters and to remove bottlenecks that may be created post NCLT’s approval. And then, reducing thresholds. Earlier, for the acquisition of distressed business assets through a resolution plan under the IBC, 75% of the committee of creditors (CoC) should have approved such a resolution plan. This was a high threshold, in contrast to legislation such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which requires approval of only 60% of secured creditors.
However, post the ordinance, the consent of 66% of the CoC is sufficient for the resolution plan to be approved. This should ease the acquisition process and lead to more (and faster) acquisitions of distressed business assets under the IBC in the future.
Finally, relief to Indian promoters. Previously, promoters whose borrowings had been classified as NPAs for a year, or more, or who had executed enforceable guarantees in favour of a creditor in respect of a company undergoing insolvency, were disqualified from submitting resolution plans. The ordinance clarifies that a promoter of a micro, small and medium enterprise (MSME) can participate in the resolution process for such MSMEs and is not disqualified provided he or she is not a wilful defaulter, and does not attract certain other disqualifications.
This is a big relief for Indian promoters who count such MSMEs in their group of companies. They will be able to, at the very least, participate in IBC proceedings to acquire these MSMEs. This exemption gives them a chance to revive and retain control of certain portions of their group. For instance, Venugopal Dhoot of Videocon, which is undergoing insolvency, has gone on record to say that he plans to use the ordinance to acquire smaller group companies on the basis that they are MSMEs.
In another interesting development, on the day the ordinance was passed, the official Twitter account of the finance ministry said corporate debtors having an annual turnover of up to ₹250 crore will also have the benefits that were extended to MSMEs. If this amendment is implemented, either through another ordinance or through an amendment to the IBC in the monsoon session of Parliament, it could have a significant impact on IBC proceedings currently before NCLT, as well as on future IBC proceedings.
While these changes are welcome, the proof of the pudding, as they say, is in the eating.
Shivpriya Nanda is joint managing partner at JSA and Sujoy Bhatia is partner, J.Sagar Associates.