Recently, you may have read headlines about how home buyers have been given more power against builders. Some other buzzwords you’ll come across commonly are bad loans, bankruptcy proceedings, insolvency, etc.
Almost all of this can be traced to a single Law – The Insolvency and Bankruptcy Code, 2016 (IBC). And recently, the law got a facelift with an ordinance that brings about three key amendments.
The Key Amendments made are:
Home buyers brought on par with financial creditors
Owners of failed MSMEs permitted to buy back their company
Voting requirements for a turnaround plan reduced
More financial companies can bid for a failed company
Guarantees by the company to not be suspended during IBC process
You may be wondering why you need to understand the Insolvency and Bankruptcy Code (IBC). There are many reasons, one of which is especially crucial to you as an investor—Taking care of exit options is as important as easing the rules for investing in companies and institutions. This can help liquidate a company and distribute the proceeds better.
This is equally important for all parties involved. After all, no company works in isolation and there are many other stakeholders who stand to suffer a loss in case a company fails. These include:
Customers who bought their products and services and depend on their continuation
Employees whose livelihood comes from the company
Lenders who extended credit to the company in good faith, with a belief that the company will pay them back
Investors who banked upon the company to be a ‘Going concern’
Not just that, some of you may have invested in the stocks of banks and lenders. With a clear law in place, banks and lenders have a better chance of recovering their bad loans. This can help improve their profitability too.
In case a company fails, the IBC suggests a way to try and restructure the company for a turnaround. If that does not work, the IBC lays down the path to liquidate the company in a manner that safeguards the interest of the stakeholders. This means selling the company’s assets to raise money.
A failing company need not file for proceedings under IBC themselves. Any of their financial creditors can do the sane if they believe that the company is no more in the position to pay them back.
Once a creditor files an insolvency petition with the National Company Law Tribunal, the company is given six months to devise a plan for a turnaround, in conjunction with Committee of Creditors (CoC). But if no such plan can be agreed upon, the tribunal can force the company to be liquidated to make the due payments to the creditors and other stakeholders.
In 2017, the Reserve Bank of India had directed banks to file insolvency petition against the major defaulters to resolve the NPAs. In December 2017, such a petition was filed by SBI against Videocon Industries.
While the company seems to have been working on a turnaround plan, nothing had been approved by the shareholders and CoC within the stipulated six-month period since December.
On June 6, 2018, the tribunal initiated bankruptcy proceedings against Videocon. It would now decide on the next steps that Videocon Industries will have to take.
Here are the key amendments made to IBC and its impact:
Impact: Over the last few years, delayed and cancelled projects from failed real estate developers had eroded home buyers’ trust. Giving home buyers a representation on the credit committee and making them a part of the decision-making process can help protect their rights and correct the trust deficit. Now, home buyers will be able to file for bankruptcy proceedings in case a housing project falls through and they are unable to recover their investments.
Impact: Pure-play financial institutions may be related to a failed company solely because of the business they do. They may even own a NPA because they have bought out a failing company, and are engineering a resolution there. They cannot be punished for this, and this alone cannot be a reason to bar them from bidding for another failed company. An expert panel headed by corporate affairs secretary Injeti Srinivas had recommended to make an exception for such institutions and the amendment has implemented the same.
Impact: Allowing promoters of MSMEs to buy back their failed company helps protect their rights as well, while providing monies to payback other stakeholders. This will encourage more entrepreneurs to take the risk of starting a company.
Impact: It is always preferable that a failing company is turned around rather than liquidated. For a turnaround to happen, shareholders and CoC must approve the turn-around plan within 6 months of filing for proceedings. By lowering the threshold of the votes needed for this, IBC has made implementing a turn-around plan easier.
Impact: Customers buy a product or service based on guarantees provided by the seller. Therefore, not upholding these is a breach of trust and infringement on the customers; rights. While other legal proceedings will be suspended when IBC proceedings are ongoing, guarantees will still have to be honoured by the company involved.
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