Govt should not go out of the way to please new promoters under IBC

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S Murlidharan

The Insolvency and Bankruptcy Code (Amendment) Act, 2019, makes it binding on the government that it will "not raise any further claim after the resolution plan is approved".

To implement this legislative intent of Parliament, the government is reportedly weighing guidelines to insulate new promoters under IBC proceedings from tax liabilities and regulatory fees that surface post takeover. These relate to the period when old promoters were in the saddle and charges of diversion of funds from banks and financial institutions.

JSW Steel is a case in point, which bid successfully for Bhushan Power and Steel by shelling out Rs 19,700 crore. It is, however, not entirely pleased with the verdict of the Delhi bench of the National Company Law Tribunal (NCLT) and may appeal the order before the appellate tribunal, seeking further indemnities from liabilities of Bhushan Power. In its 138-page-long order, the NCLT has given it protection from the criminal cases filed against the promoters, but is silent over the money laundering cases.

Every resolution bidder wants a ‘clean’ company and protection from prosecution and claims for past misdeeds, if any. JSW is worried that it may have to reap a bitter harvest of the Bhushan Power promoters’ action who have been charged with diverting funds from banks.

The Delhi High Court has only added to its worries by ruling that the Prevention of Money Laundering Act takes precedence over the IBC and in fact overrules it. This has naturally made JSW more apprehensive, which explains its push for complete immunity once the new promoter pays up the bid amount.

Will the government bend over backwards to please new promoters taking over the reins of loan defaulting companies coming up before the NCLT under the IBC? Does the overriding nature of the IBC enable the government to ride roughshod over time-honoured accounting principles and company jurisprudence?

The Company Law in India -- as indeed the world over -- has always maintained a clear distinction between a company and its promoters, vesting the company with its own personality independent of its promoters. This is so much so that on amalgamation, the amalgamated company picks up all the liabilities of the amalgamating company.

But the government through the IBC has carved out an exception for resolution bidders insofar as tax liabilities are concerned.  Having tasted success, bidders are asking for more, and the government seems to be in a mood to keep them in good humour.

Next could be insulation from charges of diversion of bank funds. The finance minister has said that when it comes to criminality, the new promoters, that is the resolution bidders, will be spared and prosecution will be launched against the earlier promoters.

Is such watertight segregation possible, especially given the fact that the company itself might be having copious information about the misdeeds of the erstwhile promoters as well as benefit financially, thanks to the shenanigans?

Again there might by a trademark case slapped against a company. Will the new promoters and their company be absolved of any liability to the real intellectual property owner?  The real owner will have the envious task of tracing the violating erstwhile promoter and his assets. He could smugly raise the finger against the company that he was promoter of. In that event, the trademark owner might fall between the two stools!

Somehow the view that the IBC is a steamroller that can be used to fly over other legislations has gained ground. Indeed, this facile view is what had prompted the NCLAT (National Company Law Appellate Tribunal) to modify the Rs 42,000-crore ArcelorMittal resolution plan for Essar Steel and treat various classes of creditors equally, providing for 60.7 per cent recovery of claims for all.

That prompted the government to push for quick changes through the IBC (Amendment) Act, 2019, to ensure the spirit of the critical reform programme of the Modi government -- coming to the rescue of secured creditors like banks – was not undermined. The NCLAT had in its overenthusiasm obliterated the time-honoured distinction between secured and unsecured creditors on priority of payment.

One only hopes that the government like the NCLAT would not go overboard in its enthusiasm and overarching desire to please the resolution bidders in order to make IBC resolution a success.  Income tax authorities may, for example, stumble upon evidence within the prescribed time to launch reassessment proceedings. Meanwhile, if the company changes hands, they would be stumped and cannot do anything except twiddle their thumbs helplessly.

One can understand the desire of resolution bidders to ideally get a squeaky clean company. If it is able to land one through due diligence, it is fine. But to expect the government to vest it with a touch-me-not character would be going a bit too far. Certainly, the government should draw the line somewhere.

S Murlidharan is a chartered accountant and columnist. Views are personal.