The decision to ring-fence assets of companies comes at a time when there have been instances of government agencies initiating action against companies whose resolution process has been completed.
On Wednesday, the Union cabinet approved amendments to the Insolvency and Bankruptcy Code (IBC) aimed at strengthening its functioning. The amendments seek to ring-fence assets of companies from offences committed by the previous management or promoters. They have also sought to raise the minimum threshold for initiating the resolution process, and have clarified that licences, permits and clearances cannot be suspended during the moratorium period. Each of these amendments, designed to address specific concerns, will help reduce investor uncertainty, and go a long way in shoring up confidence in the resolution process.
The decision to ring-fence assets of companies comes at a time when there have been instances of government agencies initiating action against companies whose resolution process has been completed. A case in point is the complication that arose in JSW Steel’s plan to acquire Bhushan Power and Steel (BPSL) with the Enforcement Directorate attaching some of BPSL’s assets. While under the law, dues owed to the central government rank below those due to financial creditors, the lack of clarity on the issue injected a degree of uncertainty in the process, led to delays, and disincentivised buyers. The amendment now seeks to address this issue. The cabinet has also increased the minimum threshold for initiating the resolution process. In the case of real estate projects, the minimum number of applicants has been increased to 100 or 10 per cent of the total applicants. This is designed to bring an end to the filing of frivolous cases in the NCLT. Further, by ensuring that licences, permits, concessions, and clearances are not terminated, suspended or renewed during the moratorium period, the amendment seeks to ensure the continuation of a business as a going concern. It will help preserve its value and retain its attractiveness for prospective buyers.
These latest amendments come after the Supreme Court judgment in the case of Essar Steel that restored the primacy of the committee of creditors on the issue of distribution of funds from the sale of stressed assets. Coupled with that judgment, these amendments address some of the remaining contentious issues surrounding the functioning of the IBC. The government should now step up its efforts to ensure that the promise of speedy resolution, one of the most appealing aspects of the IBC, is delivered upon.