THE GIST of Editorial for UPSC Exams : 16 December 2019 (IBC amendment: Companies shouldn’t be allowed to go scot free (The Hindu))

IBC amendment: Companies shouldn’t be allowed to go scot free (The Hindu)

Mains Paper 2: Polity
Prelims level: Insolvency and Bankruptcy Code (Second Amendment) Bill
Mains level: Highlights the significance of the bill

Context:

• The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, has been hailed by many as a paradigm-changing move, which paves the way for a smooth takeover by the new promoter of an insolvent company.
• A case that had brought up this issue was that of Lakshmi Mittal’s ArcelorMittal, which successfully bid for Essar Steel through the insolvency process, and had sought immunity from any future investigations pertaining to the company and its erstwhile promoters, the Ruia family.
• Likewise, the attachment of assets of Bhushan Power and Steel Ltd worth ₹4,000 crore by the ED has reportedly delayed the ₹19,700-crore insolvency resolution by JSW Steel.

Significance of the bill:

• The truth is all those successfully bidding in the IBC resolution process had been lobbying for clearing the decks for smooth takeover, with no baggage of past cases and recovery proceedings to dog them in future.
• The Bill also says all licenses, permits, quotas, clearances, registration, concessions etc conferred on the company will continue despite the changing of hands of the controlling interest.
• The Bill grants almost everything the takeover lobby has been pleading for.

Fleeing promoters:

• Finance Minister Nirmala Sitharaman confidently told Parliament that the erstwhile promoters, who have been banished from the scene and who presided over the insolvency of the company, would be responsible for their own and the company’s misdeeds as well as liabilities.
• The Indian corporate history has nothing to reinforce or bear out the confidence of the Finance Minister in this regard.
• It is replete with instances of promoters running amok with their companies’ funds, while the government watches helplessly.
• The sordid sagas of the grounded Kingfisher Airlines and Jet Airways vividly come to mind.
• Mehul Choksi and Nirav Modi, promoters of Gitanjali Gems, too are thumbing their noses at the Indian government and Indian banks from distant shores. The censorious tag of ‘fugitive’ has not shamed them a wee bit.
• The story of diversion of funds by company promoters is the same — give loans to a subsidiary or associate, which in turn gives a similar loan to another and so on in a labyrinthine route.
• Till the trail fades away into a distant but convenient tax haven (with banking secrecy laws thrown in for good measure) like the Bahamas, Camay Island, Panama etc.
• The new trend that is also emerging is, soon after the funds, the wily promoters too fade away to foreign destinations from where they mock the Indian government and banks.

Absolving from blame:

• It is one thing to grant the new promoters immunity from criminal proceedings for the ignoble acts of their predecessors, but to completely absolve the company of any liability springing from the pre-takeover era will benefit no one.
• A company is a continuum or going concern. Its profile does not change with the change of promoters or management. Therefore, it simply cannot shrug off the liabilities that might surface later on post-takeover.
• Amalgamation is the other form of company rehabilitation. The company law says the amalgamated company inherits all liabilities, actual as well as contingent, of the amalgamating company. They don’t just disappear or resolve themselves.
• Assets and liabilities are two sides of the same coin, just like rights and duties. If all the assets including licenses, patents, trademarks etc of the new company go to a new promoter, all liabilities should too.
• Burdening the new promoters thus would be a dampener in IBC-led resolution is a facile, self-serving specious argument that turns the time-honoured legal principles of continuity on its head.
• Spare the new promoters from criminality by all means, but do not throw the protective ring around the company — which might have been, for all we know, complicit in the crimes committed by the erstwhile promoter.

Way forward:

• The Bill says the company and its officers will cooperate with the investigative agencies presumably on the ground that it would be at least privy to, if not complicit with, the erstwhile promoter’s shenanigans.
• But then, that is not the same as coercive proceedings against its properties which it might have landed through the deceitful and ignoble ways of its former promoter.
• The Bill, law-enforcing agencies like the ED, the Serious Fraud Investigation Office and the CBI are going to be hobbled and frustrated.
• Crooks will laugh up their sleeves. The common man would be bemused.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to the International Court of Justice (ICJ), consider the following statements:
1. It is the principal judicial organ of the United Nations (UN).
2. The seat of the Court is at the Peace Palace in New York.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A
Mains Questions:
Q.1) What are the key highlights of the new IBC amendment?