Bankrupt MSME promoters may be allowed to bid for their companies

Homebuyers likely to be termed creditor, cooling off period possible

The insolvency law committee, headed by the Ministry of Corporate Affairs Secretary Injeti Srinivas, is expected to suggest significant changes in the Insolvency and Bankruptcy Act. 

The 14-member expert panel is looking at allowing promoters of micro, small & medium enterprises (MSMEs) undergoing resolution to bid for their own companies, a source said. The expert panel is also likely to provide clarity on whether homebuyers can be treated as creditors. The need for cross-border insolvency is also being deliberated. In addition, the committee would remove any ambiguity around the definition of “connected person” and “related party” in the recently amended Insolvency Act. A clear “cooling off” period may also be introduced. 

The last amendment made in the Act barred promoters from bidding for their own companies undergoing resolution. However, experts said around 70 per cent MSMEs would only have the option of liquidation as there are few takers for such companies. 

The review of the clause on “connected person” and “related party” is critical, as in the present form it has triggered numerous disputes amongst bidders like in the case of Essar Steel where ArcelorMittal is locking horns with a consortium led by VTB Capital, which also includes the Ruias. The Russian company has pointed out that the bid from Mittal should be declared ineligible under Section 29A. Similarly, others allege that because of the presence of Rewant Ruia, the son of Ravi Ruia as a trustee in one of the companies, which is part of the consortium with VTB, they should also be ineligible. The Ruias are the promoters of Essar Steel. 

Clarifying the position of homebuyers by classifying them as either operational or financial creditors is of significance, experts said. Currently, homebuyers do not feature in the scheme of things under the Insolvency and Bankruptcy Code. They are only allowed to submit their claims to the insolvency board. Thousands of consumers who have booked flats and have paid their instalments have been demanding equal rights in getting their money back in case of non-delivery of flats. One of the cases in the National Company Law Tribunal is that of real estate group Jaypee Infratech. 

Fast-tracking of resolutions through more efficient timelines is being considered as well. 
 

On cross-border insolvency provisions, the government is examining whether it would benefit India or not. A cross-border insolvency framework is a reciprocal arrangement between two governments having similar insolvency codes. It provides a mechanism to liquidate or recover from foreign assets of Indian companies undergoing insolvency or vice versa.

If the cross-border insolvency provisions come into effect, these will be on the lines of the United Nations Commission of International Law model. Several of the big 12 companies undergoing resolution have foreign assets and creditors.