The Insolvency and Bankruptcy Code's (IBC's) controversial Section 29 A, which bars promoters from bidding for companies against whom IBC proceedings have started, is slowly getting diluted due to the amendments in the law and different court orders.
The National Companies Law Appellate Tribunal (NCLAT), the appellate tribunal under IBC, has recently passed a judgement paving the way for promoters to settle with creditors even after the company has been ordered to be liquidated under the insolvency law.
The insolvency law requires a corporate debtor to be liquidated if no resolution plan is accepted by the committee of creditors within the stipulated time. The relief comes under Section 230 of the Companies Act, which talks about a scheme of arrangement between the creditors and the promoters. For the scheme to be successful, it requires the consent of 75 per cent creditors and shareholders.
The NCLAT order has come in a case involving corporate debtor Amar Dye Chem. Promoters of other companies under liquidation such as Gujarat NRE Coke and Hindustan Dorr are also trying to get their companies back by using the same provision. The NCLAT order in the Amar Dye Chem case only increases their chances of regaining their companies.
While for promoters this comes as a relief as they have hopes of regaining control of the company even after the latter goes into IBC proceedings, many stakeholders believe allowing the corporate debtor to go for a settlement with the creditors, after the liquidation process has started, is a sheer waste of time and effort.
Sanjeev Ahuja, founder director, Ensemble Resolution Professionals Private Limited, an Insolvency Professional Entity, says, "Imagine 8-10 months of futile efforts, where nobody is actually ready to buy the company and now after liquidation has been announced the promoter is back in control to get back his company."
"Liquidation order means you decided that nothing can be done, so sell the assets and close the company. After liquidation, application of Section 230 of Companies Act -- first of all that is a separate law, how can Companies Act parachute in IBC process -- is like giving a very long rope to a defaulter, who had already lost control of the company," says another resolution professional on the condition of anonymity.
Sanjeev Ahuja says, "Section 230 requires approval of 75 per cent of all the creditors, whereas IBC requires approval of 66 per cent of the committee of creditors (CoC). Now, if (resolution with) 66 per cent (approval) was not possible how can (resolution with) 75 per cent be possible?"
The committee of creditors is comprised of all the secured creditors with voting rights in proportion to the unpaid loan due with the defaulting company.
Earlier, the government had amended the insolvency law to include Section 12A, which allows withdrawal of insolvency proceedings against a corporate debtor if 90 per cent of the CoC agrees.
There are already noises being made by many stakeholders over the misuse of the provision. Ever since Section 12A, was inserted in the law and made effective six months ago, as many as 80 cases of insolvency have been withdrawn using this provision against 88 cases that have been resolved so far in the past two years.
Meanwhile, in the Swiss Ribbon insolvency case the Supreme Court has said that insolvency proceeding can be withdrawn before the constitution of CoC even after the case has been admitted in NCLT.