MSMEs under insolvency can now bid for their firms

In a major relief to homebuyers and Micro, Small and Medium Sector Enterprises (MSMEs), the government on Wednesday brought in several amendments to the Insolvency and Bankruptcy Code (IBC) by promulgating an ordinance after President Ram Nath Kovind gave his assent to it.

With this, homebuyers will get the status of financial creditors in the insolvency resolution process. "The ordinance provides significant relief to home buyers by recognising them as financial creditors. This would give them due representation in the Committee of Creditors (CoC) and make them an integral part of the decision making process. It will also enable home buyers to invoke section 7 of the IBC against errant developers," the government said. Till now, homebuyers have been sitting outside the CoC and had no voting rights.

Though the government has classified homebuyers as financial creditors at par with banks, it has not defined them as secured creditors. "Whether homebuyers are secured or unsecured, they will have to represent their case in the court properly. We have consciously kept away from it," MInistry of Corporate Affairs secretary Injeti Srinivas told reporters.

MSME promoters will now be able to bid for their enterprise undergoing Corporate Insolvency Resolution Process (CIRP), provided the person is not a wilful defaulter and does not attract other disqualifications. The amendment will allow further exemptions or modifications for the sector, if required, in public interest, the government said.

As per the latest amendments, the stressed companies will be allowed to withdraw from the IBC process with the approval of 90% of the CoC. However, this has to be done before publication of notice inviting Expressions of Interest (EoI). There can be no withdrawal once the commercial process of EoIs and bids commences, the government clarified. "Some of the specific issues that would be addressed include non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximising value of assets," the government said. The regulations will bring in further clarity by laying down mandatory timelines, processes and procedures for corporate insolvency resolution process, it further said.

The requirement for getting a resolution plan approved has also been eased. The voting threshold has been brought down to 66% from 75% for all major decisions such as approval of resolution plan and extension of the resolution period. To facilitate the corporate debtor to continue as a going concern during the CIRP, the voting threshold for routine decisions has been reduced to 51%.

The existing section 29(A) of the IBC, 2016 has also been fine-tuned to exempt pure play financial entities such as banks from being disqualified on account of Non Performing Asset (NPA). This is being seen as a major relief to the banks which may have got into the definition of promoters due to an outstanding loan or loan being converted into equity during restructuring.

Similarly, a person who may have acquired an asset which is an NPA in the past under the IBC has been provided with a three-year cooling-off period, from the date of such acquisition.

The clause 29A related to the conviction of a promoter has also been relaxed to allow a person who has been convicted two years prior to submitting a resolution plan to participate in bidding.

The ordinance provides for a minimum one-year grace period for the successful resolution applicant to fulfill various statutory obligations required under different laws. The other changes brought about by the ordinance include non-applicability of moratorium period to enforcement of guarantee, introducing the requirement of special resolution for corporate debtors to themselves trigger insolvency resolution under the Code, liberalising terms and conditions of interim finance to facilitate financing of corporate debtor during CIRP period. IBBI has been given a specific role along with powers to levy fee in respect of services rendered. The amendments are based on the recommendations of the Insolvency Law Committee headed by the MCA secretary.

...& ANALYSIS

• Promoters can bid provided the person is not a wilful defaulter and does not attract other disqualifications
   
• The existing section 29(A) of the IBC, 2016 has also been fine-tuned to exempt pure play financial entities such as banks from being disqualified on account of Non Performing Asset