In this article, Vibhuti Kochhar, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on bidding on stressed assets under IBC
Introduction
The Insolvency and Bankruptcy Code, 2016 was enacted with the purpose of amending and unifying the laws relating to reorganisation and insolvency resolution of corporate persons, partnerships firms and individuals in a timely manner. The Code gave the provisions for insolvency resolution and liquidation of a corporate person which did not restrict any person from putting forward a resolution plan or to acquire stressed assets.
There were apprehensions raised to the fact that as there was no bar on any person from submitting a resolution plan or acquiring assets of a company in liquidation, the provisions of the Code could be misused by persons who had wilfully defaulted to regain control of the corporate debtor sans a major part of the debt. Thus, Section 29A was introduced to the code first, through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 dated 23rd November 2017 and then by Insolvency and Bankruptcy Code (Amendment) Act, 2018 dated 19th January 2018 to provide for making certain persons ineligible for being a resolution applicant and bidding on stressed assets.
What is a stressed asset?
In today’s economy stressed assets are getting much of the attention as diminishing asset quality has surfaced as a big economic risk to the Indian Banking sector. Stressed assets are a powerful indicator of the health of the banking system and in order to understand them, we must first understand what Non-performing assets are.
Non-performing assets are those loans whose interest or principal has not been repaid by the borrower within 90 days of the expiry of the loan repayment term.
Stressed assets, on the other hand, are those debts that are doubtful to be repaid and 30 days have elapsed from the stipulated time of repayment of the debt. Generally, stressed assets lead to NPAs.
How do you bid against a stressed asset?
The Insolvency and Bankruptcy Code, 2016 provides under Section 6 that when any corporate debtor commits a default, corporate insolvency resolution process may be initiated against him by a financial creditor, an operational creditor or the corporate debtor himself.
A resolution applicant may submit to the resolution professional a resolution plan that is placed before the committee of creditors. A resolution applicant is defined in Section 5(25) as a person, who individually or jointly with any other person, submits a resolution plan to a resolution professional.
A resolution plan can be said to be a bid for the corporate debtor, through which the resolution applicant proposes to repay the bad debt or part of the bad debt of the corporate debtor to the operational creditor and gains control of the corporate debtor as a going concern.
Disqualifications from bidding on stressed assets
Section 29A gives the disqualifications to being a resolution applicant and thereby is a restrictive provision, it has ten parts and any person falling within these criteria is ineligible to be a resolution applicant as defined in Section 25 (2)(h) and may not submit a resolution plan. The section further states that any other person acting jointly or in concert with the prospective resolution applicant shall also be ineligible to submit a resolution plan.
A meticulous analysis of the Section 29 A shows broadly four scenarios in which a person is ineligible from submitting a resolution plan. They are as follows:
- where the person itself is ineligible;
- where a “connected person” is ineligible;
- where a “related party” of connected persons is ineligible; and
- where a person acting “ jointly or in concert” with a person afflicted from the first three cases of ineligibility, becomes ineligible.
The person itself is ineligible if such person is
- an undischarged insolvent;
- a wilful defaulter;
- has been convicted for any offence punishable with imprisonment for two years or more;
- is disqualified to act as a director under the Companies Act, 2013;
- prohibited by the Securities Exchange Board of India from trading in securities or accessing the securities markets;
- As per Clause (c) of the Section 29A, a person or a person acting jointly or in concert with such person is barred from being a resolution applicant if such person:
- has an account that has been classified as a non-performing asset as per the guidelines of the RBI under the Banking Regulation Act, 1949; or
- is a promoter of a corporate debtor whose account has been classified as a non-performing asset; or
- is in control of a corporate debtor whose account has been classified as a non-performing asset; or
- is under the management of a corporate debtor whose account has been classified as a non-performing asset.
The clause further states that at least a period of one year should have lapsed from the date of such a classification till the date of the commencement of the corporate insolvency resolution process of the corporate debtor.
The proviso to this clause gives the criteria for making that person eligible to submit a resolution plan under certain circumstances being if that person makes payment of all the overdue amounts with interest and charges accrued to the NPA account before submitting the resolution plan.
Clause (g) of the Section gives the criteria of vulnerable transactions and states that any person who has been a promoter or in the management or control of a corporate debtor involved in such transactions would not be eligible to a resolution applicant if the National Company Law Tribunal (adjudicating authority) has passed an order with respect to such transactions.
Vulnerable transactions include:-
- preferential transaction (Section 43)
- undervalued transaction (Section 45)
- extortionate credit transaction (Section 50)
- fraudulent transaction (Section 49)
Clause (h) gives the disqualification of those persons who have entered into guarantee obligations with respect to a corporate debtor which is undergoing insolvency procedure under this Code. As per this clause, the guarantee should be in favour of a creditor in respect of the corporate debtor and the creditor should have made an application for insolvency resolution that has been admitted under this Code. Thus, guarantors who do not fulfil their obligations towards the creditors are disqualified from being resolution applicants.Any person who has been inflicted from the above-stated disqualifications under any law outside the jurisdiction of India is also ineligible for submitting a resolution plan.
Connected Persons
The Second case of disqualification deals with “connected persons” as given under Clause (j) of Section 29 A and the explanation to this clause.
The clause states that a person who is connected to a person who suffers from ineligibility as given in clauses (a) to (i) of Section 29 A too shall be ineligible to be a resolution applicant under this Code.
The expression “connected person” is defined under the explanation as any person who is :
- Promoter; or
- Person in management; or
- Person in control
of the resolution applicant (clause (i))or any person who is proposed to be a promoter, person in management or control of the corporate debtor during the implementation of the resolution plan (clause (ii)).
Clause (iii) of the explanation includes “holding company, a subsidiary company, associate company or related party” of a person referred to in the above clauses.
The proviso to the explanation gives exceptions to clause (iii) for
- Scheduled banks;
- Asset reconstruction companies registered with RBI under Section 3 of the Securitisation Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and
- alternative investment funds registered with SEBI.
Therefore, these are not included in the ambit of clause (iii) and can proceed to submit a resolution plan.
Related party
Section 5 (24) defines “related party” of a corporate debtor. This definition would be applicable to the cases where the person referred to in the above clauses of the explanation is a corporate debtor. However, where the persons are other than the corporate debtor the definition of a related party under this section would not be applicable.
Where the person is a company the term “related party” would be interpreted with respect to section 2(76) of the Companies Act, 2013. In any other case, the scope of the term “related party” is open to interpretation.
Jointly or in Concert
The expression “persons acting jointly or in concert” has been added to the Amendment act which suggests that aside from the persons ineligible under Section 29 A any other person who acts along with such person afflicted from such ineligibility with a common objective of submitting a resolution plan would also be ineligible to bid against stressed assets and be a resolution applicant.
Conclusion
The disqualifications given in Section 29A of the Code limits the scope of potential bidders who may submit a resolution plan and bid for stressed assets. The provision seeks to exclude those persons having questionable legal and financial credibility by increasing transparency in the process. This means that the resolution applicants would have to submit their details along with the details of persons acting jointly or in concert with them. The intent of the provision is to exclude persons with poor antecedents from submitting a resolution plan and thereby affecting the credibility of the resolution process.
This provision may affect genuine bidders, interested in taking over stressed assets, as it includes promoters, their “connected persons” and persons acting “jointly or in concert”. It imposes strict limitations and restraints on potential applicants and includes even those persons who suffer from these disqualifications even outside the jurisdiction of India. As a result of this, the number of bidders may significantly reduce affecting the price of the asset and the ability of the creditors to recover their debt.
