India is tweaking its bankruptcy law to prevent successful bidders from backing out

• The government is changing the Insolvency and Bankruptcy Code (IBC) to prevent bidders from backing out for superficial reasons after submitting a winning bid.
  
• The move is a response to a spate of withdrawals by successful bidders, most recently seen the case of Liberty House reneging on its commitment to buy Amtek Auto.
  
• The amendment will likely require the winning bidder to deposit a percentage of the bid amount with the government after the bidding process is over.

It might seem surprising that India’s latest change to its bankruptcy code is aimed at ensuring the winning bidder for an insolvent company or its assets actually honours its bid.

But given the spate of withdrawals by successful bidders, most recently seen the case of Liberty House reneging on its commitment to buy Amtek Auto, the government is finally changing the Insolvency and Bankruptcy Code (IBC) to prevent bidders from backing out for superficial reasons after submitting a winning bid, according to Corporate Affairs Secretary Injeti Srinivas.

A new policy involving a “security deposit” of sorts will likely be implemented. This will require the winning bidder to deposit a percentage of the bid amount with the government right after the bidding process has been completed.

In the event that the winning bidder withdraws its bid, it will have to forfeit its security deposit. Furthermore, investors that renege on their bids could also be “blacklisted,” which means that they won’t be able to take part in future auctions of indebted companies, or have criminal proceedings initiated against them, according to media reports.

The move is an attempt to make the resolution process under the IBC more effective. Nearly 900 cases were still pending under the bankruptcy regime as of December 2018, a third of which had gone on longer than the maximum resolution period of 9 months.

This isn’t the first time the government has changed the code and it won’t be the last. In August last year, the Parliament voted to give homeowners a say in the resolution proceedings of property developers and construction companies. More importantly, in November 2017, the government barred promoters from bidding for their own firms.

Critics of the IBC have also cited conflict of interest arising from giving the committee of creditors (CoC) the final say over resolution plans.

As opposed to the actual owners or shareholders of a company, the creditors’ motivations mainly concern the recovery of their claims, even if it means the liquidation of a business that could be viable following the infusion of capital. But companies also are required to pledge their assets or collateral at the time of taking out a bank loan in case of a default.


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