Proposed IBC Amendments Address JSW Steel’s Bhushan Power Problem

The bankruptcy code is set to be amended yet again—this time to the advantage of bidders set to take over insolvent companies facing criminal action, as well as those corporate debtors who feared losing government licences, approvals after being admitted to insolvency. The threshold for triggering insolvency against real estate companies is proposed to be increased as well to prevent potential abuse.

Criminal Offences: Ring-Fencing Bidders

This amendment puts to rest the question that first arose in Bhushan Power and Steel Ltd.’s insolvency process. While approving JSW Steel Ltd.’s resolution plan, the National Company Law Tribunal had refused to grant any immunity to Bhushan Power from ongoing criminal investigations.

JSW Steel had contended before the NCLT that all present and future liabilities on account of criminal investigations against Bhushan Power should stand extinguished. The absence of any such protection would jeopardise the feasibility and viability of the resolution plan. But the NCLAT had dismissed this argument. This made way for the Enforcement Directorate to recover from Bhushan Power an amount equivalent to funds that have been diverted by the company’s erstwhile promoters.

At the heart of it, the question of law that needed answering was whether the Prevention of Money Laundering Act would prevail over IBC. If this was answered in affirmative by court, resolution applicants of companies facing criminal action would continue to have a Damocles sword hanging over their heads.

This has now been addressed by the proposed amendments, with certain safeguards.

A corporate debtor will now get immunity from any offences committed before the initiation of insolvency and while the process is on. A corporate debtor cannot be prosecuted for offenses from the date a resolution plan is approved by the adjudicating authority. The immunity also stands extended to the property or assets of a corporate debtor, which cannot be attached, seized, confiscated or retained, the bill said.

But this immunity comes with a rider. It won’t apply to:

• A promoter, or
• Any person who was in control or management of the insolvent company, or
• A related party of such a person, or
• Any person deemed to be an ‘officer in default’ as per company law and was directly or indirectly involved in commission of offences committed by the insolvent company.

The proposed amendment is a welcome change for interested bidders and would encourage more and more resolution applicants to come forth and bid for stressed assets, Bharat Chugh, partner at L&L Partners, told BloombergQuint. The rider, he said, minimises the chances of abuse by promoters accused of criminal offences.

“With this amendment, unscrupulous promoters will not be able to deal with tainted money and take the company to insolvency by design in order to legitimize the ill-gotten gains.”

The government will also need to make corresponding amendments to PMLA because enforcement agencies may not recognise these provisions under the Insolvency Code and thus an inclusion would minimize litigation, he said.

Also Read: Will Bhushan Power’s Past Continue To Haunt JSW Steel?

Real Estate Allottees: Revised Threshold For Triggering Insolvency

Last year, homebuyers were given the status of a financial creditor under the insolvency code. This allowed homebuyers to initiate insolvency if the real estate company defaulted, delayed possession and vote in the creditors’ committee meetings through an authorized representative. Currently, the code does not contain any minimum threshold for initiation of insolvency proceedings by homebuyers, resulting in multiple fragmented proceedings against a corporate debtor.

The proposed amendment seeks to introduce a threshold by saying that the process can be initiated by one hundred allottees under the same real estate project or more than ten percent of allottees, whichever is less. Ongoing insolvency applications by real estate allotees which have not been admitted by the NCLT must comply with the modified thresholds within thirty days from the notification of the amendment in the Code.

This will stop flippant initiation of corporate insolvency process at the hands of select persons, ensure that homebuyers exercise their rights responsibly in the larger interest of the real estate projects and allays the concerns of real estate companies regarding disruption in their projects, Ashoo Gupta, partner at Shardul Amarchand Mangaldas & Co., said.

Ajay Shaw, partner at DSK Legal, agreed. “Not all instances, where homebuyers are aggrieved, warrant insolvency proceedings. Their grievances can be addressed through RERA, which is a homebuyer-centric law,” Shaw said.

Insolvent Companies: Meaningful Moratorium

Another key change seeks to insulate an insolvent company from regulatory uncertainty arising due to cancellation of a licence or approval. Companies in heavily regulated sectors like telecom, aviation and mining are likely gain from this proposed amendment, experts say.

The bill said any licence, clearance, concession, permit or grant given by the central or state government, regulator or local authority cannot be suspended or terminated on grounds that the licensee has become insolvent. This is conditional upon the fact that the corporate debtor does not default in making payments for keeping it intact.

Similarly, supply of goods or services considered to be critical by a resolution professional for ensuring survival of a corporate debtor cannot be terminated or affected during the moratorium period, unless there is a default by the corporate debtor in making payments.

This amendment will benefit only those insolvent companies which are able to generate sufficient cash flows in order to meet their current statutory dues, Anshul Jain, head of regulatory practice at PwC India, said. Companies which are either not able to generate sufficient cash flows or are closed down, their rights, permits, licences, etc. can be taken away. In which case, this would further diminish the value proposition for such companies and there would be lesser number of buyers for them during the insolvency process, Jain said.