RS passes amendments to insolvency code: Govt says priority is to keep companies growing rather than to liquidate

Initiating the debate on the Bill, Congress member Vivek Tankha said the government should protect only those businesses which are affected by the pandemic and not all defaulters. (LSTV/PTI Photo)

Rajya Sabha on Saturday passed amendments to the Insolvency and Bankruptcy Code, replacing an ordinance promulgated by the government in June to suspend for six months and extendable up to one year the initiation of bankruptcy proceedings against companies to “protect them from Covid-related stress”.

Finance Minister Nirmala Sitharaman said the ordinance was promulgated to protect companies from defaults occurring after March 25

Replying to a nearly two-hour debate, in which Opposition parties picked holes in the Bill and criticised the government for promulgating several ordinances during the lockdown period, Sitharaman said the insolvency proceedings against corporates which defaulted on loans prior to March 25 will continue and the amendment will not stall those cases.

She also said that the government had promulgated ordinances because it “responds to the developing situation on the ground” and argued that it is a responsive government’s duty to show that it is with the people of the country.

A statutory resolution moved by CPI(M)’s K K Ragesh against the Bill was defeated through a voice vote. Ragesh asked why the government, which was saving businesses and corporate, was not applying the same logic in the case of farmers. “Farmers are also bankrupt. Why is the Government not taking any responsibility or initiative in waiving off farmers’ loans?” he said.

Initiating the debate on the Bill, Congress member Vivek Tankha said the government should protect only those businesses which are affected by the pandemic and not all defaulters. Sitharaman said the Bill “does not provide any protection against frauds”.

Tankha pointed out that the Section 10-A in the Bill states that no application for initiation of the Corporate Insolvency Resolution Process shall be filed for any default, whether Covid-19 related or not, arising on or after March 25 for a period of six months or such period not exceeding one year form such date as may be notified. He asked the government whether it was sure that the pandemic would end in one year, and said that there is no certainty that the economy will revive in one year.

Sitharaman said if the clause “not exceeding one year” is removed, it would “naturally and directly mean excessive delegation to the Executive”.

“I would rather come here and ask the House in its wisdom, would you want to extend it? So we have put that restraint on ourselves while it is tempting to have the Executive take the power,” she said.

Tankha said non-performing assets and defaulting problems are pre-pandemic and Section 10-A would only postpone the problem and not solve it. He said creditors would be in a worst position with likely erosion in the value of assets.

“The entire object of IBC code is compromised by this amendment. The code aims to prevent wilful default by companies. However, the blanket bar on Sec 7,9,10 will enable many companies which are already under defaulting categories to use the notification as a shield to protect themselves in future proceedings…..Do we want to protect Covid-19 category of industries or all industries irrespective of their performance in the past. Section 10-A does not make distinction between Covid-19 defaults and other defaults,” he said.

Arguing that the government’s intention was right, TMC’s Dinesh Trivedi said the Bill was a “hastily drafted, ill-worded piece of legislation” which would defeat its own purpose. “While the intended objective of the Bill is to provide protection to the debtor in this unforeseen serious turndown in the economic situation, it will only result in rapid value erosion of the capital employed – own capital and also borrowed capital,” he said.

Sitharaman said the IBC is working well as it ensures that most of the “resolutions are happening to make the company a going concern only rather than liquidated… priority is to keep the companies to be a growing concern rather than liquidate at the earliest”. She said the law provides for carrying out insolvency and bankruptcy proceedings against corporate debtors as well personal guarantors together.

Citing data for NPAs of commercial banks during 2018-19, she informed the House that Lok Adalats recovered 5.3 per cent, Debt Recovery Tribunals (DRTs) recovered 3.5 per cent and SARFAESI recovered 14.5 per cent. On the other hand, IBC ensured 42.5 percent of recovery. Sitharaman said most of the resolutions are happening to make the company to be a going concern only.

She said 258 companies were saved from going bankrupt through the IBC process, while 965 firms went for liquidation.”…258 companies were rescued which means employment is back again with them. Companies which have been liquidated in total, three-fourths of them were defunct and were also given liquidation solution and therefore at least loss of employment was reduced,” she said.

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