The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted with the intention to expedite and simplify the framework for insolvency and bankruptcy in the country. The notion of ‘creditor in control’ instead of ‘debtor in possession’ is candidly observed by the Code. However, there persisted grey areas in the code and they served as an impediment in achieving objective of the Code. One of the lacunae was that there existed no specific provision as to who can submit a resolution plan. Therefore, anyone was eligible for being a resolution applicant including the errant promoters of the corporate debtor who contributed to the downfall of the company.
To cover this gap, Section 29A was inserted in the Code in 2017, which restrained defaulting promoters and their related persons from being a resolution applicant. However, the amendment could not resolve the issue in entirety as there still prevailed a backdoor entry route available to errant promoters upon failure of resolution process. The process of liquidation, as a result of failure of resolution, provided a parachute to promoters through Section 230 of Companies Act. Section 230 permits the promoters or any class of creditors of a company to reach a compromise or arrangement with other stakeholders of the company to take control of the company.
Section 29A of IBC and Section 230 of Companies Act were contradictory in spirit. Therefore, Insolvency and Bankruptcy Board of India(“IBBI”) tried to plug in this loop hole by amending the Liquidation Process Regulations, 2016. The amendment clarifies that a person, who is not eligible according to the Code to submit a resolution plan for insolvency resolution of the corporate debtor under Section 29A, shall not be a party in any manner to a compromise or arrangement of the corporate debtor under Section 230 of the Companies Act, 2013. It also clarifies that a secured creditor cannot sell or transfer an asset, which is subject to security interest, to any person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor.
Prior to the amendment, the Adjudicating Authority passed several decisions wherein it observed that there is nothing under Section 52 of the Code to preclude the sale of the secured assets to the ex-promoters of the corporate debtor. However, the amendment is an attempt to change the scenario upside down as the errant promoters will not be able to have the driving seat again even under liquidation.
Interestingly, it appears that the amendment failed to take into consideration certain practical intricacies of the procedure. Firstly, it is obscure whether the promoter, who is not intending to take the total control of company, purchase specific assets of the company under liquidation. Secondly, it is also unclear whether promoter can come into picture if there are no resolution application and no buyers during liquidation. Apart from this, Section 29A of the Code prohibits the related person of defaulting promoters from submitting resolution plan. Thus, even a related person that has parted decades back from the promoters and is successfully running an independent business will be barred from entering into any compromise or arrangement for purchase of assets under liquidation as section 29A disallows it. Such a bar appears to be unjust and it seems that the Section is being stretched too far. Therefore, more clarity is needed on the issue.
Moreover, the amendment has failed to serve the last blow and the game of the ex-promoters is not over yet. It is pertinent here to take into consideration the case of Sterling Biotech wherein the defaulting promoters of the debt ridden corporate debtor were allowed to take back the control. A one-time settlement offer was proposed by the promoters to the creditors when the CIRP was going on. The offer got a green signal by the committee of creditors. This led to withdrawal of application as per section 12A of IBC. The NCLT disallowed withdrawal of application vide order dated 28.08.2019 whereas the Appellate Tribunal reversed the order of NCLT vide its order dated 08.05.2019 . However, the ruling of Hon’ble NCLAT was criticized immensely as it failed to take into consideration that the one-time settlement offer was akin to a resolution plan as it exposed creditors to deep haircuts. It allowed the promoters to have the last laugh by gaining the control of the company again.
For now, there is no bar for the promoters from proposing any such settlement offer when the CIRP is ongoing. Therefore, it will be interesting to observe the interesting to observe the standpoint of Adjudicating Authority in similar cases hereafter.
The amendment lines up with the spirit of the Section 29A of the Code. It expounds the intention of the law makers i.e. to restrict the ex-promoters from not only participating under CIRP, but also under liquidation. However, there are still uncovered apertures that may become the issue of litigation in future by the obstinate promoters. These issues must be given immediate attention with a view to closing all the entry routes for the errant promoters.