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Saturday 25 January 2020

Back door entry for errant promoters? NCLAT allows promoters under liquidation settle with creditors

Section 29A of IBC & Section 230 of Companies Act are conflicting in spirit, not in letters of law. Both laws are working at cross purpose.

New Delhi: The fate of several companies is hanging in the balance as defaulting promoters approach the NCLT to settle dues with creditors. In May, the Mumbai Bench of the NCLT had rejected Sterling Biotech’s application for withdrawal of insolvency plea and passed a liquidation order. The Bench had questioned the lenders on accepting a deal from absconding promoters. The NCLAT, however, stayed the liquidation order after an appeal by the banks this month.

Opening up a new window for promoters looking to retain control of their companies facing bankruptcy proceedings, the National Company Law Appellate Tribunal (NCLAT) has held that shareholders and owners can reach a settlement with creditors when their entity is under liquidation and an official liquidator has been appointed by the insolvency court.

The NCLAT order has far-reaching consequences over the resolution of stressed assets, especially those where promoters are seeking settlement post-initiation of bankruptcy proceedings in the National Company Law Tribunal (NCLT).

As per amendments made to the Insolvency and Bankruptcy Code (IBC), promoters are barred from participation in the resolution process of their stressed assets If at the liquidation stage, they are now permitted to file an application for approval of settlement with creditors, several promoters could jump at the opportunity as it would allow them to retain control of their respective companies while cleaning up the debt.

The government official and audit firms believe that promoters can take part in the liquidation process once their companies are out of the purview of the Insolvency and Bankruptcy Code (IBC).

Section 29A of the IBC does not allow non-performing asset (NPA) holders, including promoters, to take part in the resolution process. However, taking creditors on board, even defaulting promoters can enter into a settlement of dues under Section 230 of Companies Act.

Section 230 of the Companies Act gives promoters’ power to make arrangements with creditors and other members. Such a provision would, however, apply only after the company’s insolvency resolution application has been withdrawn by the support of 90% of the lenders under Section 12A of IBC, which allows debtors another chance to retain control over a firm even after a case is admitted to the National Company Law Tribunal.

“Once you are out of the insolvency process, IBC does not apply to you. Under Companies Act, you are allowed to enter liquidation as a promoter.” Anshul Jain, a partner, PwC, said: “Value maximisation should be the underlying objective in the entire process. If the process under Section 230 helps achieve a higher value for the asset, the regulatory framework should enable it.”

Experts feel defaulting promoters might misuse the Companies Act provision to get a backdoor entry into their firms. “The Section 29A of IBC and Section 230 of Companies Act are conflicting in spirit, not in the letters of the law. Both laws are working at cross purpose,” a legal consultant said. About 99 stressed firms have opted for withdrawal of resolution applications under Section 12A and over 400 have gone for liquidation.

“Liquidation has happened in cases where there is negligible value left,” the senior government official quoted earlier said.

The government is expecting that the current trend of liquidation overtaking resolution will get reversed and the huge backlog of distressed assets will be cleared in the next few years.

The Insolvency and Bankruptcy Board of India has proposed changes in liquidation norms to provide defaulting promoters with a chance to file for a compromise or arrangement in event of a liquidation.

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