New Delhi: Amendments to the Insolvency and Bankruptcy Code (IBC) expand the scrutiny over pre-bankruptcy transactions of distressed companies to cover a longer period, finance and corporate affairs minister Nirmala Sitharaman said on Wednesday in Rajya Sabha.
The upper house of parliament returned the amendment bill by Lok Sabha on Monday.
Sitharaman explained that the ‘lookback’ period has been expanded to cover two years of pre-bankruptcy transactions leading up to bankruptcy petition being filed before the National Company Law Tribunal (NCLT), the first forum of debt resolution proceedings.
“This will reduce the incentives for promoters to delay admission of cases,” Sitharaman said.
The NCLT, on petitions filed by administrators of the sick companies, can reverse these dubious pre-bankruptcy transactions known as ‘avoidance’ transactions. It can also order recovery of assets from such transactions. The lookback period is crucial as distressed companies are prone to transactions affecting the interests of its creditors.
Currently, transactions done up to two years prior to admission can be cancelled in the case of related party transactions, and up to one year in the case of other transactions.
However, there is often a significant delay between the filing (initiation) of an insolvency petition and its admission, which can slow down debt resolution.
to shift the milestone from ‘admission’ of proceedings to ‘initiation’ of bankruptcy action expands the scope of scrutiny and reduces the incentive for promoters to fight back admission of cases.
Sitharaman also informed the lawmakers that creditors’ panels overseeing debt resolution have to record reasons for their choice of successful bidder for the assets.
The minister conceded that litigation has been a major challenge facing debt resolution under the IBC.
“Primary cause for delay is extensive litigation. Promoters tend to litigate or attempt settlements, delaying admission and as a result, you end up with delays. Parallel recovery processes also cause delays,” she said.
The amendment bill has incorporated provisions to overcome the delays in debt resolution. New penalty provisions have been brought in against persons initiating frivolous, vexatious proceedings to abuse the process and cause delays, the minister said. Penalty ranges from ₹1 lakh to ₹1 crore if bankruptcy process initiation is vexatious or frivolous, Sitharaman said.
As of end-December, the has facilitated resolution of 1,376 distressed companies, enabling creditors to recover ₹4.11 trillion, the minister informed the Rajya Sabha. Financial creditors have been able to recover a little more than a third of their claims.
The IBC process is market-driven and the recoveries reflect underlying asset quality and commercial viability of the distressed enterprise, Sitharaman said.
The minister also said that the proceedings against a defaulting company halt on successful debt resolution, but proceedings against erstwhile promoters continue.
The IBC is being amended in order to cut delays in admission of cases, reduce litigation and cost of debt resolution and make the process informal in certain cases subject to guardrails. The idea is to help banks and businesses to repair balance sheets efficiently.
The IBC was introduced in 2016 replacing the erstwhile Sick Industrial Companies Act, 1985 under which proceedings often languished for tears. The amended code allows the government to issue frameworks for dealing with insolvency of multiple companies in a group and cross-border insolvency.