RGICS LEGISLATIVE BRIEF – The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 is a bold attempt to prevent wilful defaulters and shady promoters from gaming the insolvency process by buying back their assets at throwaway prices. But there’s a problem: the ordinance’s overly strict criteria lump everyone together, from outright fraudsters to genuine businesspeople caught in bad economic cycles. This broad brush approach could seriously hurt small businesses that rely on their promoters for rescue plans, and its retroactive application is bound to make ongoing insolvency cases messier and more drawn out.

Passed on November 23, 2017, the amendment to the Insolvency and Bankruptcy Code, 2016, was designed to clean up India’s insolvency process by banning certain promoters and entities from bidding for stressed assets. Under the newly added Section 29A, promoters whose companies have been labeled Non-Performing Assets (NPAs) for over a year, wilful defaulters, and those involved in fraudulent transactions are all barred from submitting resolution plans.

The idea is simple: keep bad actors from buying back their companies for cheap and leaving creditors in the lurch. But the reality is more complicated. By grouping together intentional defaulters with those who’ve fallen on hard times due to bad market conditions, the ordinance risks cutting off legitimate bidders, shrinking the pool of potential buyers, and making it harder for banks to recover their money.

Small and Medium Enterprises (SMEs) are hit especially hard. Around 70% of SMEs in insolvency proceedings face liquidation because their promoters — often the only viable bidders — are banned from presenting resolution plans.

The ordinance’s retroactive nature further complicates things by affecting ongoing cases, potentially leading to lengthy legal battles. While the intent is to clean up the process, the heavy-handed approach may end up doing more harm than good, particularly for smaller companies that are already struggling.

Keywords: Insolvency, Bankruptcy Code, Resolution Professional, Wilful Defaulters, Resolution Plan, Promoters, Non-Performing Assets (NPA), Liquidation, Retroactivity, Small and Medium Enterprises (SMEs)