May 1, 2019

Insolvency proceedings: Defaulting promoters may get chance to come back

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Defaulting promoters, who are barred from submitting resolution plans and bidding for their stressed companies under the Insolvency and Bankruptcy Code (IBC), may get a last chance to make a comeback at the liquidation stage. A discussion paper on the corporate liquidation process along with draft regulations, floated by the Insolvency and Bankruptcy Board of India (IBBI), has proposed that a credible ‘compromise or arrangement’ proposal can be made by players (including promoters) to the liquidator under the Companies Act.

This means if a stressed firm undergoing insolvency process doesn’t attract any resolution plan and is deemed for liquidation under the IBC, a last-ditch attempt can be made to save the company from liquidation through the compromise scheme by invoking section 230 of the Companies Act. Importantly, section 29A of the IBC, which makes defaulting promoters ineligible to become resolution applicants, won’t be applicable in such cases.

In fact, the National Company Law Appellate Tribunal in the case of SC Sekaran has directed the liquidator to give the scheme of compromise a chance before selling any asset. The scheme of compromise and arrangement was also tried in cases of Amar Dye Chem and Gujarat NRE Coke during liquidation. The regulator has sought comments on the draft regulations from stakeholders and public in general by May 19.

The IBBI move came at a time when almost 53% of the CIRPs (corporate insolvency resolution processes) completed by the end of March ended in liquidation and only in 13% of cases, resolutions were found for stressed firms. Of course, most of these “dead cases” were transferred from an earlier regime where resolution was not expected. However, considering that liquidation directly causes job losses, the regulator seems to have floated the latest proposal, aligning the relevant sections of the IBC with the Companies Act, to keep the company a going concern and maximising the asset value, said analysts.

The draft regulations have also proposed that a stakeholders’ consultation committee — with representation from financial and operational creditors, among others — be set up to advise the liquidator on the sale of assets and/or business. Currently, under the IBC, only financial creditors are part of the committee of creditors that make decision on resolution plans.

The draft regulations also said that liquidation should be achieved in one year and any extension of the deadline may be granted only by the NCLT. Currently, while there is a 270-day deadline for resolution, there is no such time frame for liquidation. “While compromise or arrangement under section 230 of the (Companies) Act is proposed, it must be utilised first and only on its closure/failure, liquidation under the Code (IBC) may commence,” the draft said.

However, a credible proposal for “compromise or arrangement” must be made to the liquidator within seven days of the date of order for liquidation by the National Company Law Tribunal.

Manoj Kumar, head (M&A, Transactions and Insolvency) at consultancy firm Corporate Professionals Capital, said the insolvency regulator has taken into account the fact that, since the lives and daily bread of numerous stakeholders are dependent upon the survival of a company, all attempts must be made to revive an insolvent one before it is liquidated. “This provision (compromise or arrangement) would also give last opportunity to the promoters of the company to make an attempt to revive it as the disqualification under section 29A would not apply to it,” Kumar said.

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