Skip to main content

Cabinet clears changes to plug loopholes in insolvency code

Cabinet clears changes to plug loopholes in insolvency code
Govt to amend insolvency and bankruptcy rules via ordinance, will block promoters deemed wilful defaulters from regaining control of firmsThe Union cabinet on Wednesday approved amendments to the Insolvency and Bankruptcy Code (IBC) to plug potential loopholes in the new corporate turn around regime and to ensure rescued companies remain in reliable hands.
Finance minister Arun Jaitley said changes to the IBC have been proposed through an ordinance that’s awaiting presidential assent.One of the changes proposed is to ensure that promoters deemed wilful defaulters do not eventually end up taking control of the company again. The exact nature of the amendment and its scope will be known only after the text of the ordinance is available after the president gives his assent, a person familiar with the development said on condition of anonymity.
“Some changes have been proposed in the Insolvency and Bankruptcy Code. Since this is being done by way of an ordinance, till it is approved, as a matter of propriety, we shall not give details,” Jaitley told reporters.
The government put in place a new bankruptcy resolution regime and empowered the Reserve Bank of India (RBI) to nudge banks to take defaulting firms to the National Company Law Tribunal (NCLT) in a decisive attempt to deal with the Rs10 trillion of toxic assets (bad loans and restructured loans) choking the banking system. The bad loans have also impaired lenders’ ability to finance new projects to boost economic growth, which slumped to 5.7% in the quarter to June, the slowest pace in three years.
The administration has been quick in responding to implementation challenges of the new bankruptcy code, one of which is the possibility of wilful defaulters subverting the legal process to remain in control of the company by proposing revival schemes. The code, as it stood prior to the amendments approved on Wednesday, does not prevent promoters of a failed company from proposing a turnaround plan. There have been concerns that promoters could reacquire their companies at a discount once the creditors decide to sacrifice a part of the money they are owed as part of a debt resolution plan.
In recent weeks, the Insolvency and Bankruptcy Board of India made it compulsory for the revival plans to take recognizance of the credentials of those who propose revival schemes, including original promoters, and to specify how the interests of employees, vendors and customers of the failed entity will be taken care of. The regulator also clarified that if the NCLT approves a turnaround scheme, the promoter will be deemed to have consented to it.
In June, RBI referred 12 large defaulters to creditors for the start of bankruptcy proceedings at the NCLT. The 12 entities made up a quarter of gross bad loans, which reached Rs7.79 trillion at the end of June.
The proposed amendments are expected to make the insolvency resolution process more robust, said Kalpesh Mehta, a partner at Deloitte India. “The implementation of this amendment would block failed promoters from regaining control of the companies facing insolvency proceedings under the Insolvency and Bankruptcy Code,” he said.
One banker red-flagged a potential challenge.
“There is a risk that a few bidders may collude with banks to declare some of the competing bidders as wilful defaulters in order to eliminate competition. In such a scenario, the amendment could lead to a fall in realization of value for the creditors,” said the banker, a deputy general manager at a public sector bank who spoke on condition of anonymity.
Sumant Batra, managing partner at law firm Kesar Dass B and Associates, said that if the bankruptcy code does not define who a wilful defaulter is, a bank’s decision to declare a promoter as a wilful defaulter may be subject to a challenge in court and will complicate the resolution process.
The Economic Times, New Delhi, 23th November 

Comments

Popular posts from this blog

At 18%, GST Rate to be Less Taxing for Most Goods

About 70% of all goods and some consumer durables likely to cost less

A number of goods such as cosmetics, shaving creams, shampoo, toothpaste, soap, plastics, paints and some consumer durables could become cheaper under the proposed goods and services tax (GST) regime as most items are likely to be subject to the rate of 18% rather than the higher one of 28%.

India is likely to rely on the effective tax rate currently applicable on a commodity to get a fix on the GST slab, said a government official, allowing most goods to make it to the lower bracket.

For instance, if an item comes within the 12% excise slab but the effective tax is 8% due to abatement, then the latter will be considered for GST fitment.

Going by this formulation, about 70% of all goods could fall in the 18% bracket.

The GST Council has finalised a four-tier tax structure of 5%, 12%, 18% and 28% but has left room for the highest slab to be pegged at 40%. A committee of officials will work out the fitment and the council…

Firms with sales below Rs.50 crore out of ambit

The tax department has reiterated that the PoEM rules, which require foreign firms to pay taxes in India if the effective control is here, will not apply to companies withaturnover of Rs.50 crore or less inafinancial year. Last month, the tax department had come out with the longawaited Place of Effective Management (PoEM) rules, which require foreign companies in India and Indian firms with overseas subsidiaries to pay local taxes if their businesses are effectively controlled by Indians. Then the rules did not setathreshold above which they were to apply. However, the accompanying press release states that the rules will not apply to companies withaturnover of up to Rs.50 crore inayear. That created confusion whether the threshold will be adhered to. Inacircular to clarify things, the Central Board of Direct Taxes (CBDT) said the provision "shall not apply toacompany havingaturnover or gross receipts of ~50 crore or less inafinancial year".

PoEM rules essentially target shell …