January , 2018
Insolvency and Bankruptcy Code – Role of Promoters in Resolution Process
14:07 pm

S. G. Choudhary

A big challenge facing the Credit Delivery Mechanism today is the rising tide of non-performing assets (NPA). The Insolvency and Bankruptcy Code, 2016, was designed as a corrective measure. An amendment was announced on November 23, 2017, barring the promoters from participating in any resolution plan to revive a business if the person is a wilful defaulter or if the said person’s account has been declared a non-performing asset for a year or more and the dues are not paid. The amendment purports to disqualify a whole cross section of people from making resolution applications under IBC which may reduce the pool of resolution applicants. This in turn may depress the value of assets put on the block and ultimately result in loss to the credit delivery sector itself.

If we analyse the situation post the recent amendment, barring wilful defaulters, it may send the right signal but should promoters of the companies be excluded from the resolution process because the account has become an NPA? Can it be said with certainty that all NPAs are a result of poor management and all promoters are crooks siphoning away public funds? Are promoters of companies which have fallen upon bad times to be viewed as lacking in scruples? This does not seem to be a wise stand if made eventually into a law.

Some promoters may have backed the company and the creditors with personal guarantees and management support to find the business in financial doldrums owing to poor market conditions or even what could be viewed in hindsight as wrong decisions. Promoters understand their business, have invested their sweat equity and therefore have a greater stake in bringing it back on its feet. In the process sell-off bids may be enhanced. Perhaps it would have been better if the government had left it for lenders to decide- if the creditor committee would accept bids from defaulting promoters or not. In that case, the resolution process could be strengthened. An acceptance of business failure and rectification are necessary to encourage people to continue entrepreneurial pursuits.

Intent of Insolvency Code 

Did Parliament intend to disqualify promoters from parti-cipating in the resolution of insolvent companies? Modern insolvency laws are built on the principle of granting a fresh start to an honest debtor in default. The IBC code has been based upon the Bankruptcy Law Reforms Committee (BLRC). BLRC had stated in its report that ” promoters can make a proposal that involves buying back the company for a certain price, alongside a certain debt restructuring”. The BLRC report further  stated that “in a growing economy, firms make risky plans, of which some plans may fail, and  induce default. If default is equated to malfeasance, then this can hamper risk-taking by firms. This is an undesirable outcome, as risk-taking by firms is the wellspring of economic growth. Bankruptcy law must enshrine business failure as a normal and legitimate part of the working of the market economy.”

This approach is reiterated in the notes to clauses of the code presented in Parliament as a Bill.

All promoters are not the same

It is true that promoters who have committed fraud should not be allowed to bid but many firms run by honest and competent promoters end up in financial distress due to factors beyond their control. Barring all promoters may result in scrupulous and competent promoters being permanently excluded from participating in the bidding process to revive the company. This might disincentivise new businesses to be set up in the first place which in turn may impede the culture of entrepreneurship and the environment for start-ups that the government wishes to encourage.

Promoters understand the business, having invested their sweat equity, and they have a greater stake in bringing it back on its feet. In the process, this can raise the sell-off bids. In a situation where creditors themselves prefer to have the promoters continue to be involved with a firm that is in financial distress, they might avoid using the new insolvency system at all, or dismiss cases strategically, undermining the scope and effectiveness of the new code.

Effective Resolution Plan

In many cases filed under the code, there are no resolution plans received other than from promoters. While the big cases in the IBC process, may not face this situation, in others the level of interest by investors is low, as India does not have a developed market for distress asset investors.

The Committee of Creditors may choose the best resolution plan, which might very well come from the promoters themselves. The COC should conduct proper diligence and make sure that the persons who have submitted the plan and would implement the same are credible, to avoid a situation where the company goes into liquidation if it is not able to adhere to the resolution plan.

As long as insolvency is not caused by fraud or mismanagement by the promoter, the resolution plan from the promoter may be given a chance. Disqualifying promoters as a class, to submit the resolution plan even by perception, can have deep implications for the resolution process. It is crucial to recognise that where there is credit, there is possibility of default. As people try their luck at business, they take risks, The bankruptcy system should facilitate this risk by design.

Confidence in the Creditors Committee

The IBC Code was designed to provide creditors significantly higher powers in deciding when to initiate insolvency cases. The code is thus built on the logic that creditors as a group know what is in their best interest. If the new amendment  is made into law – by implication it suggests that creditors are not equipped to decide whether the promoters should participate in their restructured companies. This may suggest lack of confidence in the Creditors Committee and institutions involved. Post the recent amendment, lenders shall be unable to accept the resolution plan from the promoters even if the promoters’ plan offers the best returns or recovery options and is, in the view of the creditors, commercially viable.

The Creditors Committee should be allowed to choose the best plan available, i.e., one  that takes care of every stakeholder and maximises the value of the enterprise. What needs to be kept in mind is that in a lot of sectors, sector-specific experience and technical know-how of that sector is very important for running the business. There are a lot of challenges and problems which only a person having experience in that field is suited to address. Therefore, in some cases, the promoters may be most suited to run such businesses if the creditors committee so decides in its collective wisdom.

Potential solutions

If the purpose of the amendment is to protect the insolvency process from unscrupulous promoters, there can be a better method  to achieve this purpose. The US bankruptcy system, has addressed this problem by allowing promoters to retain control if they put in new value equivalent to their new stake and the bidding is open to other bidders. Additionally, if a class of creditors objects to the plan, the presiding bankruptcy court must determine that the resolution plan is neither unfair nor discriminatory to the objecting class.

Protections of this kind could easily be devised and introduced into the Indian Insolvency and bankruptcy Code. Promoters could be allowed to submit bids, for example, only if an inde-pendent resolution professional is assigned to the case by the Insolvency and Bankruptcy Board. The resolution professional and the NCLT could be required to ensure that the promoters put up new value equivalent to their stake in the reorganized firm and strictly review other aspects of the resolution plan and the process of its approval by the creditors committee.

A condition may be put that the Promoters should not be wilful defaulters and forensic audit should clear them of any malfeasance.


There may be a number of situations when stable companies become insolvent due to factors, which are not attribu-
table to the promoter.

The amendment ( Section 29A) of IBC code maybe therefore be viewed as contrary to the basic tenets of insolvency law and not aligned to global best practices. It may also face a legal challenge on grounds of discrimination under Article 14 of the Constitution of India. The government would be ill-advised to go that route and expose the code to a legal scrutiny when the code is designed for scaling up India’s Ease of Doing Business ranking.

— The writer is a Senior Finance
Executive.The views expressed are his personal opinion.

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