Willful defaulters must not be allowed to buy back their assets (The Hindu)

Mains Paper 2 : Polity
Prelims level : Section 29A
Mains level : Banking regulations norms

Context

• The discussion paper on corporate liquidation process put out by the Insolvency and Bankruptcy Board of India last week has inexplicably left a backdoor open for ineligible promoters to reclaim control of their company.
• Section 29A, that was inserted into the Code in 2017 to keep out errant and wilful defaulters from buying back stressed assets under a resolution process, may not apply to compromise deals or arrangements under Section 230 of the Companies Act, if the proposal in the discussion paper goes through.
• Section 230 essentially deals with ‘Power to Compromise or Make Arrangements with Creditors and Members’, which may include reconstruction or amalgamation/merger/demerger of companies or reduction of share capital or even corporate debt restructuring.
• As proposed, while sale of assets under liquidation cannot be made to persons ineligible under Section 29 A, such persons may not be barred from participating in the scheme of arrangement under Section 230 of the Companies Act.

Background

• The entire argument is built on the oft repeated intent of the Code resolution and revival of the corporate debtor rather than liquidation.
• In the famous Supreme Court ruling in Swiss Ribbons vs. Union of India, it was reiterated that the steadfast intent of the IBC was to revive a corporate debtor; liquidation is only a last resort if resolution fails.
• In the ArcelorMittal India vs. Satish Kumar Gupta case, it was cited that even in liquidation, every effort must be made to sell the business as a going concern.
• In the NCLAT ruling in the SC Sekaran vs Amit Gupta case, the appellate authority had directed the ‘liquidator’ to consider provisions of Section 230 of Companies Act, 2013 before taking steps to sell the assets.

Liquidation effect

• Given that liquidation brings the life of a firm to an end, destroys organisational capital and is hugely damaging to employees, workmen and the industry at large.
• It is true that every effort must be made to sell the corporate debtor as a going concern. But the proposal of letting ineligible promoters under Section 29A of the Code to participate in the compromise or arrangement under section 230 of the Companies Act needs an immediate rethink.
• The very purpose of the IBC would be defeated if fraudulent promoters were to re-acquire the business, at throwaway prices.
• Chronic defaulters and fraudulent promoters cannot be allowed to game the system, owing to mere difficulties in implementing the ineligibility criteria under Section 230.

Conclusion

• The discussion paper also argues that it is not only the liquidator (resolution professional under IBC) but also creditors and members (shareholders) who can propose a compromise or arrangement under Section 230.
• It may be a good idea to review this provision to avoid misuse by various stakeholders. \
• Above all, adhering to a strict timeline for concluding the process of compromise or the completion of the liquidation process is of greatest importance.
• A long drawn liquidation process can erode the underlying value of assets steeply leaving little for creditors.

Prelims Questions:

Q.1) With reference to the Jallianwala Bagh massacre, which of the following statements is not correct?
(a) Lord Chelmsford was the Viceroy during this massacre.
(b) Hunter Committee was set up to investigate its wrongdoings.
(c) Gandhiji returned the Kaiser-i-Hind title in protest against the Jallianwala Bagh massacre.
(d) Colonel Reginald Dyer was the Lieutenant Governor of Punjab during this massacre.

Answer: D

Mains Questions:
Q.1) Defaulting promoters should not be allowed to game the IBC system. Comment