Assets of companies under insolvency can’t be attached by agencies

NEW DELHI: Government agencies will soon be barred from attaching assets of an insolvent debtor undergoing bankruptcy resolution for prior offences, making such stressed assets more attractive to potential buyers, if Parliament clears proposed amendments to the insolvency law, experts have said.

“It is in response to development we see in the economy,” said finance minister Nirmala Sitharaman, introducing the IBC (Second Amendment) Bill, 2019 in the Lok Sabha on Thursday. “Please do help us to respond to the economy as all of us are equally concerned,” she said, acknowledging lack of the two-day mandatory notice for introducing the bill.

The Cabinet approved amendments on Wednesday. The opposition wanted the bill to be sent to a standing committee.


“No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to commencement of the corporate insolvency resolution process.., where such property is covered under a resolution plan approved,” said the proposed amendment. Such action will include attachment, seizure, retention or confiscation, it says.

Manoj Kumar, partner at law firm Corporate Professionals, said, “While individual prosecution against promoters or management can continue, the asset itself will have no strings attached.” Acquisitions under the Insolvency and Bankruptcy Code (IBC) will be more attractive and realise better value for stakeholders, he said.

The move is expected to help companies such as Bhushan Power, REI Agro and Rotomac Global that are undergoing insolvency resolution. “In Bhushan Power’s case, even if the National Company Law Tribunal order has been passed, the transaction is not closed yet,” said Uday Bhansali, president, financial advisory, Deloitte.

FINANCIAL ENTITIES
The proposed amendments also provide that a financial entity regulated by a financial sector regulator will not be considered a related party or connected person to the corporate debtor merely because it had acquired shareholding through a conversion of debt into equity or instruments convertible into equity shares. This change would ensure they are not barred from resolution process because of such a relation.

“The clarification makes it easy for financial institutions that hold multiple equities in different companies to bid for the entity or any stressed asset,” said Abizer Diwanji, partner and national leader, financial services, EY. “For example, SBI will not be disqualified now for bidding for DHFL.”

REAL ESTATE

The amendments provide that a minimum of 100 or 10% of homebuyers of a real estate project will be required to initiate insolvency proceedings against a company, giving relief to companies, as the change will be applied retrospectively. This will help in cutting frivolous litigation, experts said. Applications made by a single financial creditor or a small number of homebuyers will lapse if not modified within 30 days.

The definition of interim finance, which includes financial debt raised during insolvency resolution period, was also enlarged to include any other debt that may be notified.