Complication can arise in willful default cases under bankruptcy code
The government has moved an ordinance for debarring willful defaulters from bidding for distressed assets under the new bankruptcy code. This is a good measure to keep the rogue promoters away. This also paves the way for new team to take over and turnaround the company. But there is likely to be complications in willful defaulters cases.
I)Cases where a single bank or few banks declare a promoter as willful defaulter
In a consortium lending, there are always over a dozen banks funding a corporate. The entire loan in default is not always tagged as a case of willful default. There are instances of few banks triggering the willful default clause to pressurize a defaulter to pay up. The committee of creditors (COC) under the bankruptcy code has to carefully analyze the willful default cases so as to not let any room for challenge in the higher courts.
II)Diversion of funds
Many a times the bank declare a minor diversion of funds within the company or group as diversion of funds , which is strictly not a diversion in true sense. The RBI guideline , take for example , includes utilizing the short term working capital funds for long term purposes as an instance of willful default. Such minor diversion cases often get defeated in the courts.
The banks have to follow a transparent mechanism to proceed against a willful defaulter. There should not be any misuse of 'willful 'default provisions. The RBI has also made it very clear that any solitary or isolated instance should not be made as a basis for declaring a promoter as willful defaulter.
IV)Setting up of committees
The RBI's willful default process clearly mentions that a committee headed by executive director or equivalent rank official of the bank has to examine the evidence of willful default. Secondly , an opportunity has to be given to willful defaulter by way of a show cause notice. The final order of the committee has to be re-examined by the chairman/ MD/ CEO and two independent directors. In the past , there have been instances of banks not following this detailed due process. Take for example , the Kolkata High Court had set aside United Bank of India decision to tag Kiing Fischer Airlines directors as willful defaulters on technical grounds.
v)The long delays of courts
Most of the willful default cases get challenged in the court. If a promoter is debarred from bidding for an asset under the bankruptcy code, he will certainly apply for a stay order on certain grounds. This will only delay the process.