Back-Door Entry Of Defaulted Promoters

News: Recently, the Supreme Court (SC) has closed the back-door entry of defaulting promoters by using a special provision of compromise or arrangement during the liquidation phase of the insolvency proceeding. The ruling reaffirms the spirit of the Insolvency and Bankruptcy Code (IBC).

Background:

  • In a case involving the liquidation of a Limited Company, the National Company Law Appellate Tribunal (NCLAT)in 2019 held that any person who was ineligible, under Section 29A of Insolvency and Bankruptcy Code (IBC), to bid for his company, was also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act 2013.
  • The Companies Act 2013 is an Indian company law which regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company.
  • Company means a company incorporated under this Act or under any previous Company Law.
  • Section 230of the Companies Act allows promoters or creditors of the company to propose a scheme of arrangement or compromise under which the debt of the company can be restructured.

Recent Ruling of the SC:

  • SC up holded NCLAT’s decision and said that while Section 230 would be applicable for promoters and creditors in the normal course of the workings of the company, it would not be applicable if the company is facing liquidation under IBC.
  • The company has to be protected from its management and a corporate death.
  • It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a compromise or arrangement under Section 230 of Companies Act 2013.

Significance of the Judgement:

  • The clarification by the SC with respect to participation of promoters in the liquidation process of an insolvent company will speed up the corporate insolvency resolution process.
  • Since the objective of the IBC is to find a suitable buyer for the company and liquidation is ordered only in cases where there are no viable plans submitted, experts believe that a quick liquidation is of utmost importance to maximise the value of assets of the company.
  • It settles down the conflicting judgments given by different benches of the NCLT,wherein these forums had, in order to follow the IBC’s principle of value of asset maximisation, allowed some of the promoters to re-bid for the company or propose some arrangement when it was sent to liquidation.