Disqualified parties barred from liquidation process, says IBBI

Promoters or related parties disqualified from taking part in the insolvency resolution will now be debarred from participating in the liquidation process, according to a notification issued by the Insolvency and Bankruptcy Board of India (IBBI) on Tuesday.

Such persons will also not be eligible to enter into any settlement or arrangement with the creditors of the insolvent company under Section 230 of the Companies Act, the IBBI has clarified. The notification for the Liquidation Process (Amendment) Regulations, 2020, comes into effect from January 6.

The Insolvency and Bankruptcy Code (IBC) had introduced Section 29A to keep wilful defaulting promoters from taking control of their company and also barred related parties to thwart any backchannels for such entries. However, Section 230 of the Companies Act — in the absence of any such provision — allows promoters to reach a compromise or settlement with the creditors once they are out of the purview of the IBC.

“Through the amendment in the regulations, the IBBI has shattered the hopes of many promoters intending to get back the business via scheme of arrangements route of the Companies Act. However, whether regulations can curtail the scope of the Companies Act is a pertinent question,” Manoj Kumar, partner, Corporate Professionals, said.

In October 2019, the National Company Law Appellate Tribunal (NCLAT) had ruled in the matter of Gujarat NRE Coke that ineligible promoters cannot reclaim control through scheme of arrangement under the Companies Act.

NCLAT had said, “Even during the period of liquidation, for the purpose of Section 230 to 232 of the Companies Act, the ‘corporate debtor’ is to be saved from its own management, meaning the promoters, who are ineligible under Section 29A, are not entitled to file application for compromise and arrangement in their favour under Section 230 to 232 of the Companies Act.”

While the amendment experts say they have brought the law in line with past judgments of the Supreme Court as well as the NCLAT, there are concerns. “What needs to be addressed are situations where there is no buyer even in liquidation cases and if the promoters are also now disqualified by virtue of this amendment. Then there is no saving such companies from corporate death by liquidation,” said Anshul Jain, partner, PwC India.  

“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,” the IBBI has clarified.

“This will be significant because it will prevent promoters from making backdoor entry by buying the assets of the company under liquidation,” said Mehul Bheda, partner, Dhruva Advisors.

The amendment provides that a liquidator shall deposit the amount of unclaimed dividends, if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon into the corporate liquidation account before he submits an application for dissolution of the corporate debtor.

“This brings clarity for liquidators on how to deal with unclaimed amounts. It will help in timely completion of the process,” added Kumar.