The government has further revised the ordinance it proposes to move to make changes to the Insolvency and Bankruptcy Code (IBC).
The updated note that will be sent to cabinet for approval is likely to restrict the wide exemption proposed earlier for micro, small and medium enterprises (MSMEs) from the provisions of Section 29A that disqualifies certain persons from bidding for an insolvent company.
The revised cabinet note will also include a provision to allow participation by promoters released from imprisonment six years before the date of submission of a resolution plan, a senior official told ET. Many of the changes to the IBC will be made through the rules and regulations.
A new cabinet note will be moved by the ministry of corporate affairs (MCA) soon to seek permission for the ordinance. The ordinance is also likely to allow the withdrawal of applications under IBC with 90% vote share of the committee of creditors under the caveat that this should happen at the time of or before the issuance of the notice inviting the expressions of interest.
The changes have been made to the code on the basis of recommendations made by the 14-member, high-level law committee chaired by corporate affairs secretary Injeti Srinivas. The earlier draft of the ordinance has been revised after consultations between MCA and the Prime Minister’s Office (PMO), according to sources.
LIMITED MSME EXEMPTIONS
The exemption for MSMEs from the provisions of Section 29A has been considered after it was found there was little investor interest in MSMEs apart from promoters. While the earlier draft of the ordinance provided exemptions for MSMEs from almost all disabilities under Section 29A, the exemptions are now proposed to be restricted in only two situations under clauses (c) and (h). Promoters and managers of declared non-performing assets (NPAs) or guarantors to creditors in respect of an insolvent entity who are not allowed to participate in resolution process under section 29A will not suffer this disability in the case of an MSME.
However, those barred for other reasons such as imprisonment for scheduled offences, banned from the market by the Securities and Exchange Board of India or disqualified as directors under the companies law among others will not be eligible to participate in the resolution of insolvent MSMEs.
A person meeting any of the disabilities under Section 29A is not allowed to offer or participate directly or indirectly in the resolution plan for a bankrupt entity.
This includes those with NPAs, guarantors of insolvent entities that have not met those pledges, and those punished for imprisonment of over two years for scheduled offences among others. However, no wilful defaulter will be allowed to bid for a stressed asset even in the case of MSMEs. “We cannot make any changes to the code which go against its character and the spirit in which it has been drafted,” another senior official said. The government has limited the disqualification of promoters for six years from the date of submission of the resolution plan. A definition for related party of individuals, which has so far not been covered in the code, is also to be added. The ordinance will also clarify that guarantors of a corporate debtor are ineligible if the guarantee has been invoked by the creditor and remains unpaid in full or in part. Besides, the moratorium will not apply to surety of guarantors to the corporate debtor.