Corporates fret over grey areas in Insolvency Code

Suresh P Iyengar Mumbai | Updated on January 09, 2018

Tax provisions, legal jurisdiction worry those interested in acquiring sick firms

Corporate houses vying for stressed assets under the NCLT-led process have expressed deep concern over grey areas in the new Insolvency and Bankruptcy Code, even as the deadline nears for the submission of expressions of interest (EoIs).

While banks are gearing up to write off a sizeable portion of the loans, the companies in the race to acquire sick companies have to declare the remainder of the debt as profit and pay income tax on it.

For instance, if a company takes over a sick unit after lenders write off ₹20,000 crore of the overall recognised bad debt of ₹50,000 crore, the remaining ₹30,000 crore will reflect as profit on the sick company’s book, and this will attract income tax at 35 per cent, said a tax expert.

Similarly, there is no clarity on whether the mines allotted by the government prior to the notification of the Mines and Mineral Development Act will be transferred along with the stressed asset.

Seshagiri Rao, Joint Managing Director, JSW Steel, said that earlier, the Sick Industrial Companies Act (SICA) had over-riding powers on all regulations for schemes approved by the Board for Industrial and Financial Reconstruction.

The new IBC, which has replaced the SICA, has similar over-riding powers on other regulations, but Section 30-(2)(e) states that the resolution plan approved by creditors and the adjudicating authority should be compliant with applicable laws.

These are two contravening provisions that can be used by any government machinery to contest the resolution plan approved and executed, he said.

Earlier, SICA had provisions to back-end the interest on loans to ease the burden on the acquirer of sick companies. The Act allowed companies to pay interest at a lower rate for three years and then hike it later to protect the interest of lenders.

“The grey areas in the IBC is like a black hole, which can suck in the acquirer along with the sick company,” said the CEO of an infrastructure company, who called for the government’s immediate attention.

Despite being a case of debt resolution, the acquirer has to obtain the Competition Commission of India’s approval, which is a protracted process. Earlier, the government had exempted SBI from CCI approval for merging five of its subsidiaries with itself.

Published on November 19, 2017

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