NEW DELHI: The government is looking to relax norms for promoters buying back companies that have gone bankrupt if the default has happened due to factors induced by last year’s nationwide lockdown.
“The government has been strict about promoters buying back companies. However, the last year was an extraordinary situation and we are considering a proposal which will allow promoters to buy back their companies if the bankruptcy is triggered by Covid. The fine print of the proposal is being discussed currently,” a senior official from the Ministry of Corporate Affairs said.
According to an amendment made in the Insolvency and Bankruptcy Code (IBC) on January 6, 2020, a defaulting promoter is not eligible to submit a resolution plan for their bankrupt company and shall not be a party to any compromise or arrangement of the company. A secured creditor cannot sell or transfer an asset to the promoters either. This was done to prevent promoter-driven attempts of liquidating their companies in an effort to buy back a debt-free business at a much lower price. However, officials note that when the law was framed, there had been no impact from the pandemic.
Once the lockdown was imposed to contain the pandemic, the Centre granted a moratorium on the initiation of insolvency proceedings for any defaults happening from March 25 onwards for a period of 12 months, giving relief to small and medium companies. Apart from this, the government also raised the minimum default threshold for initiation of insolvency proceedings to Rs 1 crore from Rs 1 lakh to protect smaller companies from the impact of the pandemic.
However, with the deadline for resumption of IBC proceedings approaching, the ministry is of the view that the moratorium should not be extended. But they also feel that some relief measures must be included for sectors which were the worst hit.
Relaxing norms for promoters buying back firms will also help in quick resolution if the defaults are primarily induced by the pandemic. Among other measures, the Centre is considering a pre-pack (out-of-court) insolvency resolution scheme for MSMEs and the MCA has already invited public comments and views on the proposed resolution system.
Deadline for resumption of IBC approaching
The Centre has granted a moratorium on the initiation of insolvency proceedings for any defaults happening from March 25, 2020 onwards for 12 months. However, with the deadline for resumption of IBC proceedings approaching, the ministry is of the view that some relief is needed for badly affected sectors.