Some of the promoters of companies facing insolvency proceedings may legally test the new ordinance on bankruptcy code, which has barred them from regaining control of these entities when the assets go under the hammer. Lawyers said founders like Ruias of Essar SteelNSE 0.00 % could approach the courts as the ordinance forces them to surrender their companies to rivals.
The new ordinance disqualifies a number of people — including promoters and management executives — of companies whose loan accounts have been classified as nonperforming assets (NPAs) for a year and more from bidding for their own assets in bankruptcy proceedings. Essar Steel, which has a current debt of Rs 42,000 crore, is among the dozen loan-defaulting companies facing insolvency proceedings. Ruias declined to respond to emailed queries.
Shardul Shroff, executive chairman and national practice head (insolvency & bankruptcy) of Shardul Amarchand Mangaldas, said, “The ordinance will save the government ‘blushes’ in a situation where promoters of existing corporate debtors seeks massive haircuts in the guise of a resolution applicant.”
Insolvency lawyer Alok Dhir said, “While the intent to weed out those who gamed the system is understandable, its broad sweep is troubling. This will lead to litigation by those who aren’t maligned and reduce the bidding fray, thereby depressing the price discovery.” Dhir added that amendments posted another peculiar problem: “How do you ensure that foreign investors do not attract similar broad-brush disqualifications?”
However, Pratip Chaudhuri, former SBI chairman, said that it was proper that promoters were barred from the bidding process. “They have already tried their hand at it and they could not succeed. There have been other companies in the same industry who have been successful in the business. This sends a message to promoters that you cannot be in default perpetually.”
Shardul Shroff pointed out that promoters of delinquent companies can submit a resolution plan, provided they pay all overdue amounts with interest and charges relating to NPAs.
Sujjain Talwar, partner at Economic Laws Practice, highlighted that nothing in the code stops anyone from warehousing the ailing asset and then selling it onwards, including to a debarred promoter.
Khaitan & Co’s disputes resolution partner, Diwakar Maheshwari, said that the amendment having retrospective impact in barring resolution plans already submitted could become a subject matter of judicial interpretation. He also wondered if the amendments to sections 25 (2) (h) and 30(4) could dilute the autonomy of the committee of creditors in functioning the tasks mentioned in the said provisions.
Ruias of Essar Steel, the most high-profile case in the RBI’s initial list of 12 defaulting companies referred to the NCLT, may argue that the company’s financial woes stemmed from external factors — abrupt snapping of gas supplies by the UPA government in 2011, and cheaper Chinese imports in an industry with huge over-capacities. Lawyers said Ruias may also point out that they had paid almost Rs 10,000 crore in servicing loan interests between 2012 to 2015 when lenders declared it as an NPA.
Several bankers who didn’t want to be quoted said most of the 50-odd cases (including the subsequent RBI lists) landing before the NCLT involve NPAs that are clearly more than a year old. As the clean-up act gathers momentum, the broad sweep of amendments uprooting entrenched promoters, who are corrupt or wilful defaulters, may carry wider ramifications for an economy riding heavily on family-run enterprises.
There were worries if such transitions would be orderly, or if it would disturb both businesses and jobs. PwC India partner Sanjeev Krishnan said the reaction from the business community wasn’t surprising, given the far reaching character of the ordinances, which precludes many potential acquirers. “One can argue that the government could have done this earlier, but they still managed to get the timing right before some of these bankruptcy cases went awry,” he added.
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