Keep promoter off liquidated assets, otherwise, bankruptcy politics will turn toxic–10.11.2017

The government’s new and improved rules for insolvency resolution are not good enough and will pave the way for huge political embarrassment for the government.

Neither the original rules nor the new ones preclude original promoters who ran their companies into bankruptcy repossessing their assets on the cheap, shorn of debt.

This is a bad idea.

The rules must, without ambiguity, bar promoters who presided over their companies descending into bankruptcy, or their associates, from bidding for the company being sold either as a going concern or as parts after liquidation.

The amended rules make it incumbent on the resolution professional to do due diligence of the applicants, who could include original promoters. The idea ostensibly is to enable the committee of creditors (mainly bankers) assess the applicants’ antecedents, credit worthiness, credibility and bar wilful defaulters from bidding for a company going through resolution. The odds of promoters failing due diligence tests and getting categorised as wilful defaulters are tiny. Unscrupulous promoters, many of whom could have inflated project costs to secure bank loans, can game the system.

They can be helped by errant bank officials who could be more than willing to take a haircut on the money lent and also help original promoters buy back their company’s assets at a cheaper price. This would be illegal enrichment of the promoter at the expense of the taxpayer who picks up the tab for the write-offs. So, the government must ban original promoters from bidding for a company that is either sold as a going concern or whose assets are being liquidated. It will ensure the credibility of the resolution process.

Original promoters should be given a chance to turn around the company while interest payments are held in abeyance for the finite period. This calls for an amendmentto the bankruptcy code, to incorporate provisions equivalent to Chapter 11of the US bankruptcy code. The larger point is to give a window of opportunity to a failed promoter, but ensure there is no illegal enrichment.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

via Keep promoter off liquidated assets, otherwise, bankruptcy politics will turn toxic

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