IL&FS gets moratorium on creditor actions; govt welcomes stay on NCLT order

Govt says pay, ongoing projects priority

The National Company Law Appellate Tribunal (NCLAT), by overturning an order of the National Company Law Tribunal (NCLT) on the government’s plea in the Infrastructure Leasing & Financial Services (IL&FS) case, has strengthened the hands of its reconstituted board.

The NCLT in Mumbai on Friday rejected the government’s plea for a three-month moratorium for the stressed infrastructure financier and its newly constituted board of directors. However, on Monday, the NCLAT stayed the interim order, which had turned down the Ministry of Corporate Affairs’ (MCA’s) request for protection against any regulatory and legal proceedings against IL&FS and its board in the case of further defaults by the non-bank finance company. 
 

IL&FS defaulted on debt instruments including loans, bonds and commercial papers (CPs) of more than Rs 41 billion as of October 1.

The NCLAT has also ordered a stay on suits any party, bank or company has filed against IL&FS and its 348 subsidiaries.

Until the next hearing, scheduled for November 13, the appellate tribunal has extended “protection” to the company and its 348 affiliates against a premature withdrawal of any loans, CPs, fixed deposits, guarantees and other financial facilities.

The NCLAT debarred bankers and financiers of IL&FS and its subsidiaries from exercising their right to set off their dues against current accounts and other deposits the company (or companies) has, a copy of the order states. Further, the appellate tribunal has instructed that notices be issued to the top five major creditors of IL&FS and its group companies.

At this juncture, the NCLAT will have to clarify an important point in terms of interpreting Section 242 of the Companies Act, which grants “moratorium” from legal action against a company.

The question that arises is: How does one term or explain the “crisis” at IL&FS? The NCLT is of the option that a “blanket” moratorium against all 348 subsidiaries and associate companies cannot be passed because powers under Section 242 of the Companies Act can be exercised only when a company's conduct has been prejudicial or oppressive to its member(s), the company itself, or to the public interest.

Illustration: Ajay Mohanty

The order by Justice Ravikumar Duraisamy and Justice V P Singh stated “the tribunal (NCLT) has exercised this power under Section 242 of the Companies Act 2013 on being satisfied that the affairs of the company (were) mismanaged ….”

Some of the group’s companies are undergoing the Corporate Insolvency Resolution Process of the Insolvency and Bankruptcy Code (IBC). Bankers say the default of the company (default on debt obligations) has “entitled” them to “set off” balances in the current accounts and other deposits maintained by IL&FS and the group companies.

IL&FS needs Rs 35 billion in liquidity support because it has debt worth Rs 40 billion coming up for redemption. This prompted the MCA to move the NCLT.

The MCA welcomed the NCLAT stay, saying the priority is to pay salaries and complete ongoing projects, rather than repaying large debt.

The government in its application said: “The board will need to look at all possible options to resolve the complexities involved to ensure fair-value and best interest of difference stakeholders including but not limited to sale of assets and recovery of claims.” 

The company has commercial suits filed in different courts and tribunals in the country, said the NCLT in its Friday order. 

The borrowings of IL&FS stand at Rs 910 billion against Rs 69.5 billion in equity capital, giving it a leverage ratio of more than 13 times.

Getting Immunity

• NCLAT also ordered a stay on suits filed by any party or bank or company against IL&FS and its 348 subsidiaries
• It said that some of the group's companies are already undergoing resolution process under the Insolvency and Bankruptcy Code
• It also debarred the bankers and financiers of IL&FS and its subsidiaries from exercising their right to set off their dues against current accounts and other deposits the company (or companies)