Potential buyers of fraud-hit companies under IBC need not worry about prosecution for economic offences anymore. The government has approved changes to the Insolvency and Bankruptcy Code to shield the new management from the wrongdoing of the previous one. The Union Cabinet on Tuesday approved Promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019. Under the ordinance, the corporate debtor (the company) will be free from any liability for offences committed prior to the commencement of the insolvency resolution process. Thus, the new management post-resolution would get control of a clean firm.
The shield will, of course, apply to the new management persons only if they were not in control of the offending company before, and were not related to the offending company’s existing management.
The cabinet’s decision clearing the way for the ordinance is a good one and was urgently needed, Bharat Chugh, Partner, L&L Partners, and former judge, said. “These changes providing for immunity to the new management of the corporate debtor, post a successful resolution plan, are most crucial to make IBC a success,” Bharat Chugh said. This would definitely encourage more bidders to bid for stressed assets – without fear of criminal prosecutions and without fear of attachment of the assets or property of the company under revival, he added.
The proposal was also included in the second amendment bill of the Insolvency and Bankruptcy Code 2016, which was proposed in the winter session in parliament, and is now referred to the standing committee on Finance.
The cabinet has also underlined that in relevant cases, the corporate debtor shall extend all assistance and cooperation to any authority that is investigating an offence committed prior to the commencement of the insolvency proceedings.
Meanwhile, in another move to make the personal insolvency process run smoothly, the government is likely to pick evaluation professionals from the already existing framework of lawyers, insolvency professionals, and chartered accountants, who would be responsible to determine whether the small borrowers have genuine cases of not being able to repay.
Source: Financial Express, December 24, 2019