By: Mohit Yadav

Mohit Yadav — Tue, 16 Jan 2018 06:34:32 +0000

The Bill that was passed by the Parliament has made various changes to the Ordinance. The ordinance faced a lot of flak from the industry stakeholders. There were three main provisions that were found to be contentious: first, barring of persons holding NPA accounts for more than one year; second, barring of persons who had given guarantee to a creditor of defaulter undergoing insolvency or liquidation and third, barring of “connected parties”.
The Bill has been successful in fine-tuning the Ordinance and dealing with many of the contentious issues raised under it. Out of the three issues raised above, the Act has satisfactorily dealt with the second and third issue. The barring of persons who had given guarantee to a creditor of defaulter undergoing insolvency or liquidation has been fine-tuned to only bar guarantors who are unable to honour the guarantee. Similarly, the concern regarding barring of PE funds and ARCs through the definition of “connected persons” has been dealt with by providing specific exemptions to them.
However, with respect to the first issue discussed, that is, barring of persons holding accounts classified as NPA for more than a year, much is left to be desired even under the Act. It is true that the task of identifying whether the company went bust due to genuine reasons or due to the promoter will always pose a challenge and the government was walking on tightrope while drafting this provision. However, it must be said that the period of one year that has been prescribed is a very short time period. It is well known that many industries run in business cycles with periods of growth and decline. Considering this aspect, one year period is too short a time to recover from a period of decline for any company, especially SMEs. A one year period can’t and shouldn’t be assumed to be a sign of mismanagement or malfeasance on part of the promoters. It is suggested that the government should consider amending this provision and increase the period to only bar persons holding accounts classified as NPA for 3 years. Special provisions may also be considered for SMEs.
The government should also consider the impact of these amendments on the already burdened resolution professionals. It further complicates the role of a resolution professional and hands them additional time consuming tasks like confirming eligibility of applicants and ordering of forensic audits for determining undervalued transactions which may put a strain on the 180 day deadline set by the Code. The example of the additional burden causing consequent delays can be seen in the recent case of MBL Infrastructure where despite the legal expert confirming that resolution applicant is eligible to bid after coming in of the Ordinance, the CoC unanimously believed that he was ineligible under the Ordinance. This confusion led to further delays and the insolvency process only resumed after NCLT provided clarity on this point.
Finally, it can only be said that as the amendment Bill comes into force, it should be kept in mind that the aim of the Code is resolution and revival and not liquidation. Hence, if the effect of amendment is to increase incidences of liquidation due to lack of competitive bids, we may have thrown the baby out with the bathwater.

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By: Mohit Yadav