THE GIST of Editorial for UPSC Exams : 09 MARCH 2019 (Back door entry for errant promoters? (The Hindu)

Back door entry for errant promoters? (The Hindu)

Mains Paper 3: Economy
Prelims level: NCLAT
Mains level: Associated issues relating to economic growth and development

Context

•  In a bid to keep out errant and wilful defaulters from buying back stressed assets, Section 29A was inserted into the Code (Insolvency and Bankruptcy Code) in November 2017.
•  While this has led to a slew of litigations questioning the eligibility of competing bids (Essar Steel).
•  The powers-that-be maintain that the clause is essential to prevent chronic defaulters and fraudulent promoters from regaining control of their company, at a fraction of what they owed lenders.

Ordered passed by NCLAT

•  The case pertains to appeals filed by the management of Hindustan Dorr-Oliver and HDO Technologies against the liquidation order passed by NCLAT in June 2018, following failure of resolution.
•  The NCLAT directed the ‘liquidator’ (insolvency professional) to proceed in accordance with the law verify claims of all the creditors, take into custody and control of all the assets, property and carry on the business of the ‘corporate debtor’ as prescribed under Section 35 of Code.
•  But before taking steps to sell the assets, the liquidator was directed to consider provisions of Section 230 of Companies Act, 2013 which deals with ‘Power to Compromise or Make Arrangements with Creditors and Members’.
•  Essentially only on failure of revival under Section 230, should the liquidator proceed to sell the company’s assets.
•  While Section 29A deters errant promoters from participating in the resolution process under IBC.
•  A liquidator introducing a scheme of arrangement under Section 230 of the Companies Act may offer an entry to promoters who are otherwise ineligible to acquire assets under IBC.

The real intent

•  The various observations of the NCLAT in the SC Sekaran vs Amit Gupta case.
•  The NCLAT ruling in essence preps the pitch for strongly endorsing resolution and revival of the corporate debtor rather than liquidation citing the Swiss Ribbons and ArcelorMittal case.
•  The very recent Supreme Court ruling in Swiss Ribbons vs. Union of India has become a landmark development for the Code, as it upholds the constitutionality of the provisions of the Code, and has brought the focus back on the intent of the IBC to resolve and revive a corporate debtor.
•  The Supreme Court observed ‘what is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark.
•  Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern citing the ArcelorMittal India vs. Satish Kumar Gupta case where the SC had observed that under Regulation 32 of the IBC, the liquidator may also sell the corporate debtor as a going concern.
•  In a nutshell all of this points to the oft repeated intent of the Code resolution and revival of the corporate debtor rather than liquidation.
•  Liquidation is viewed as the antithesis of resolution and hence the Code allows liquidation only after the process fails to yield resolution.

Companies Act provisions

•  But what if the resolution process fails and the company is put into liquidation mode?
•  Even so, the focus is on reviving rather than dissolving the company.
•  The NCLAT ruling in SC Sekaran goes on to cite the Meghal Homes vs Shree Niwas Girni K.K. Samiti case, in which the Supreme Court upheld the provisions under Section 391 of the Companies Act, 1956 and Section 230 of the Companies Act, 2013.
•  These provisions give a right to the liquidator (resolution professional under IBC) to propose a compromise or arrangement with creditors and members (shareholders) even in the case of a company which is being wound up.
•  Section 230, in effect 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.
• What does this imply in the IBC context?
•  Currently, Section 29A deals with keeping out errant and wilful defaulters from buying back stressed assets, under the corporate insolvency resolution process under IBC.
•  This section was streamlined last year when the Insolvency Law Committee removed the unintended exclusions and widened the pool of eligible bidders.
•  But while Section 29A debars errant promoters from bidding in the resolution process.
•  It does not specifically preclude them from participating in the scheme of arrangement under Section 230 of the Companies Act.
•  Only if under liquidation, the asset is sold (in whole or part) does Section 29A apply.
•  With adjudicating authorities likely to take cues from the recent NCLAT and Supreme Court rulings.
•  It is likely that many more liquidation cases will be directed to consider Section 230 and push for ‘liquidation as a going concern’ rather than dissolution.
•  It needs to be seen if this will once again lead to endless litigations concerning the eligibility of the promoters participating in the scheme of arrangement under Section 230.
•  One of the provisions under Section 230 mandates the consent of 75 per cent of secured creditors (by value) and shareholders for corporate debt restructuring plan or any other scheme of arrangement.
•  Under IBC, the approval of resolution plan requires 66 per cent vote (brought down from 75 per cent threshold last year).

Conclusion

•  If one assumes that the resolution plan failed (and the company then goes into liquidation) on account of failure to garner the requisite voting share of 66 per cent.
•  It is unclear how a corporate debt restructuring plan or any other scheme of arrangement under Section 230 can muster 75 per cent voting share of shareholders and creditors of every class.
•  Possibly the adjudicating authorities will cross that bridge when they come to it.
•  But these ambiguities should be proactively ironed out by the Insolvency and Bankruptcy Board of India, the adjudicating authorities and the Centre, to avoid endless litigations that is now testing the efficacy and sanctity of the Code.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Consider the following statements regarding 'Dearness allowance' :
1. It is paid by the government to its employees and pensioners in a bid to avoid the impact of inflation.
2. It is linked to the Wholesale Price Index.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A

Mains Questions:
Q.1) What do you mean by the willful defaulters? What does this imply in the IBC context?