New owners of bankrupt companies and such entities themselves are finally set to be shielded from criminal liabilities arising due to the offences committed by previous management/promoters.

This landmark reform, which is a part of a set of proposed amendments to the Insolvency and Bankruptcy Code 2016 ( IBC), has gotten the green signal from the Union Cabinet on Wednesday, paving the way for more bidders/resolution applicants to come forth and bid for stressed assets in the country.

In all likelihood the proposed legislative changes to the IBC may go through in the ongoing winter session of Parliament itself.

Simply put, the Government is moving ahead to strengthen the IBC framework by ring-fencing the corporate debtor (already in the hands of a successful resolution applicant) from attachment/criminal proceedings against offences committed by previous managements.

“The proposed changes; especially those relating to ring-fencing, should help restore investor and banker confidence in the IBC process,” said Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas, a law firm.

Why is this reform important?

It would definitely widen options in terms of interested bidders and encourage more resolution applicants to come forward to bid for stressed assets, without the Damocles sword of attachment of assets/criminal proceedings swinging over their heads, said Bharat Chugh, Partner, L&L Partners and a former judge.

There have been cases in the recent past where assets have been included in the information memorandum available to the potential buyers and bids have been made and won on that basis, but before it comes to execution of that plan, the Enforcement Directorate (ED) comes in and attaches the property, upsetting the bargain. This has far reaching implications for the bidder and the company alike. This also has a chilling effect on bidding and greatly undermines the very spirit of IBC which is maximisation of value, according to Chugh.

This also undermines another important aim of IBC, which is to give ailing companies — a fresh start and a clean slate.

Great boost

The proposed reform on ring-fencing is significant as it would give the person bidding for a company enough assurance that new management and remaining assets of the company are safe. It is only with that legitimate expectation that someone will invest in the company and assets would command a price commensurate with their value.

Sapan Gupta, Partner and National Head of Banking and Finance, Shardul Amarchand Mangaldas & Co said that the approval by the Union Cabinet to provide immunity to successful bidders under IBC process is a great boost to the Code. This is a positive and timely step and will increase confidence among prospective buyers of stressed assets.

Lessons learnt

Among the other changes to the IBC, the Centre has proposed introduction of additional thresholds for financial creditors represented by an authorised representative due to large numbers (read home buyers) in order to prevent frivolous triggering of corporate insolvency resolution process (CIRP).

Clearly, the Government has learnt some lessons from the experience of a single home buyer misusing the framework and dragging a entire real estate company to National Company Law Tribunal.

Meanwhile, the Centre has in the Insolvency and Bankruptcy Code (second amendment) Bill stipulated that at least hundred allottees under the same real estate project or 10 per cent of total number of allottees under the same real estate project, whichever is less is required to initiate Corporate Insolvency Resolution Process (CIRP).