Govt plugs the loophole in bankruptcy law. Why that's not enough

After facing flak for leaving loopholes in the bankruptcy law that allowed defaulting companies to bid for their own assets during the insolvency process, the government has finally shut all such doors.

The amendment approved in the Insolvency and Bankruptcy Code (IBC) on Wednesday ensures that only a new set of management would be able to take control of the assets put under the hammer.

In the amendment, the insertion of Section 29A does the most important job by making “certain persons ineligible to be a resolution applicant”. In this category, wilful defaulters, those who have their accounts classified as non-performing assets for one year or more and connected persons to the above category, would not be able to bid for any assets under IBC resolution.

The amendment became important after the promoters of the Essar Group, who lost control of their assets in Essar Steel after failing to service their loans worth Rs 37,284 crore submitted bids to purchase their own assets from the lenders.

While the Essar group had all the rights to do so as per the law of the land, it made life difficult for the Modi government which is trying to create a narrative that they are forcing corporate world to be accountable towards borrowed money.

The IBC, which became operational in December 2016 under which National Company Law Tribunal, tries to help a company to put its finances in shape or face liquidation. Currently over 300 cases are being monitored under the IBC.

Had the government not fixed this loophole, none of the corporate houses would have felt the need to repay their loans and would have preferred losing their assets only to be able to bid for them under the IBC resolution plan.

This would have almost doubled the amount of non-performing assets in the banking sector which now stand at more than Rs 8 lakh crore.