India: Wilful Defaulter must not buy IBC Assets

December 7, 2017


In order to protect honest creditors against the unscrupulous debtors who are using insolvency as a shield to evade of their liabilities, the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) was incorporated. The IBC works in pursuit of insolvency resolution process in a time-bound manner for maximization of value of assets which promotes entrepreneurship, availability of credit and balance the interests of all the stakeholders.

In the recent approach, the President of India vide notification dated November 23, 2017,
promulgated Ordinance no. 7 of 2017 (hereinafter referred to as “Ordinance”) with a view
to strengthen the insolvency process. It has been considered necessary to provide for prohibition of certain persons from submitting a resolution plan who can account for their antecedents, may adversely impact the credibility of the processes under the consideration of IBC. The ordinance has laid down the
category of persons not eligible to submit a resolution plan which include the following person(s)/ connected person(s) (Section 29A introduced):

  • Undischarged Insolvent;
  • Willful Defaulter as per the Reserve Bank of India (hereinafter referred to as “RBI”) guidelines issued under the Banking Regulation Act, 1949 (hereinafter referred to as “B.R. Act”); or
  • Whose account has been classified as “Non-Performing Asset” as per RBI guidelines issued under B.R. Act and a period of 1 year has elapsed from such classification and who has failed to make the payment of the overdue accounts with the interest thereon along with charges related to Non-Performing assets before the submission of the resolution plan;
  • Convicted for any offence punishable with imprisonment for 2 years or more;
  • Disqualified Director under the Companies Act, 2013;
  • Prohibited by the Securities Exchange Board of India from trading in securities or accessing the security markets;
  • Indulged in preferential/ undervalued/ fraudulent transaction in respect of which order has been made by the Adjudicating Authority under the IBC;
  • Executed enforceable guarantee in favour of a creditor, in respect of a corporate debtor under the insolvency resolution process or liquidation under IBC;

Earlier, the Government through its press release dated November 7, 2017, issued Amendments to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017. The said amendments ensures that the resolution applicants would be subject to more stringent scrutiny before approval of their insolvency resolution plans by the Committee of the Creditors (constituted by the Resolution Professional under the provisions of IBC).

Additionally, with the intent to increase the efficacy of the proceedings initiated under the IBC, the Central Government (hereinafter referred to as “Government”) forewarned the entire banking sector to be vigilant enough to ensure that willful offenders do not derive benefit of the process. The Government focuses on ensuring that the unfair entities are prevented from re-entering the system by the way of purchase of assets. It was elaborately discussed the concerns regarding the increasing outstanding debts. Around 12 accounts each having more than INR 5,000 crore of unsettled loans account for 25 % of total Non-Performing Assets of banks are under the IBC process. The net amount due to these accounts taken together is INR 1.75 lakh crore. The banks are also interested to get their other large non-performing accounts considered by the National Company Law Tribunal (NCLT) as per the IBC. There has been an increase in the Non-performing assets of public sector banks from Rs. 2.78 lakh crore in March 2015 to Rs. 7.33 lakh crore as of June 2017.


The Government has been consistently working towards refining and improving the new legal regime being set forth under the IBC. The efforts of the IBC attempt to revive the corporate entity by divesting the management of the business or proceed with the liquidation in a restricted time frame.

By the introduction of the recent changes, the legislation is acting in the furtherance of the objective of the IBC to safeguard the interests of the innocent creditors. The underlying fundamental of the IBC of effective resolution can be achieved only with a credible resolution plan drawn up realistically and implemented successfully. It is essential that the resolution plan drawn up do not result in failure post execution. To ensure the acceptability of the best suited plan for resolution, stringent approval mechanism has been adopted where under the credibility of the person submitting such plan shall be scrutinized. The new amendment brought via the ordinance has specified the criteria of persons eligible for submitting the resolution plans thus assuring the definite implementation of IBC.

The Government has also imposed the requirement of the Banks to be vigilant in respect of the dishonest entities making an endeavor to reduce the adding liability of the Non-Performing Assets. This exercise of conscious effort on the end of the Banks would help them identify the defaulters and prevent them from using the IBC mechanism to their advantage.

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