The recent amendment to the bankruptcy law — that requires shareholder approval before a company files for insolvency and also mandates that the administrator convince the tribunal that the resolution plan is effectively implementable — will benefit small stakeholders but delay resolution.
Last week, the Indian president approved to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, which was cheered for bringing home loan buyers at par with financial creditors besides other changes.
The revised Act says the corporate debtor can file insolvency commencement petition only if its shareholders pass a special resolution. “This restricts access to IBC by corporate debtor which is contrary to global best practices,” said Sumant Batra, insolvency expert and managing partner of Kesar Dass. “This will lower the country’s score on the ease of doing business.”
Besides, getting shareholder nod would be time consuming, particularly for listed companies. “Adding one more layer to the process and resultant delay in insolvency process initiation by the corporate debtor - this is the price to be paid for preserving sanctity of shareholders’ rights over management of affairs of company in letter and spirit,” said Hari Hara Mishra, director of UV Asset Reconstruction Company.
“Since this is a major corporate step, it is only in the fitness of things that such action be taken only after approvals by the shareholders and imparts greater transparency in such corporate actions,” said Sunil Srivastava, former deputy managing director of State Bank of India. Bankruptcy cases against as many as 850 companies have been admitted to National Company Law Tribunal. Of this, the decision for liquidation has been passed for 100 companies and resolution is approved in another 30 cases.
This apart, the amendment also says that before approving the resolution plan, the adjudicating authority should be satisfied that the plan has provisions for its effective implementation. “This will prompt greater scrutiny by adjudicating authority thus exposing resolution plan approvals to delays and uncertainties,” said Batra. “The onus to ensure that the plan can be executed effectively was on the lenders who approved it.”
“Till recently, the matter was approved based on RP's compliance certificate. Now the RP will need to elaborate as to how the new management shall implement the plan and who shall be supervising it till it is fully implemented,” said Subodh Agarwal, registered resolution professional.
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