India amends bankruptcy law to protect winning bidders from paying the price for sins of the previous promoter

Seeking to remove bottlenecks and streamline resolution process, the Cabinet on Wednesday approved further amendments to the more than three-year-old insolvency law wherein successful bidders will be ring fenced from any risk of criminal proceedings for offences committed by previous promoters of companies concerned. The Insolvency and Bankruptcy Code (IBC), which came into force in 2016, has already been amended thrice. The latest changes pertain to various sections as well as introduction of a new section.

The IBC (Second Amendment) Bill, 2019, is likely to be introduced in the current session of the Parliament, according to a senior official.

The amendments are aimed at removing certain difficulties being faced during insolvency resolution process to realise the objectives of the Code and to further ease doing of business, an official release said.

In a significant move, there would be ring-fencing of corporate debtor resolved under the IBC in favour of a successful resolution applicant from criminal proceedings against offences committed by previous management/ promoters.

It assumes significance against the backdrop of instances of enforcement agencies taking action in case of companies where the resolution process has already been completed.

Providing immunity to the corporate debtor that has been resolved under the IBC process and also from encumbering such an entity's properties. The successful bidder should not have the risk of a corporate debtor being made an accused by any enforcement agency, the official said.

According to the release, the amendments would remove bottlenecks, streamline the corporate insolvency resolution process and that protection of last mile funding would boost investment in financially-distressed sectors.

"Additional thresholds introduced for financial creditors represented by an authorized representative due to large numbers in order to prevent frivolous triggering of Corporate Insolvency Resolution Process (CIRP)," it added.

The amended Act would also ensure that the substratum of the business of corporate debtor is not lost. It can continue as a going concern by clarifying that the licences, permits, concessions, clearances etc cannot be terminated or suspended or not renewed during the moratorium period, the release said.

Law firm Cyril Amarchand Mangaldas Managing Partner Cyril Shroff said the proposed changes, especially those related to ring-fencing, should help restore investor and banker confidence in the IBC process.

"The government has rightly enhanced the focus on ensuring sustenance and recovery of businesses from bankruptcy, which is essential to sustain the economy and drive growth. Additional focus is now needed on boosting IBC related infrastructure, to hasten the recovery process," he noted. RAM RAM ABM ABM