NCLAT stays NCLT order on govt's plea seeking protection for IL&FS board

The order noted that some of the groups' companies are already undergoing the Corporate Insolvency Resolution Process of the Insolvency and Bankruptcy Code

In an quick turn of events, the National Company Law Appellate Tribunal (NCLAT) overturned an order of the National Law Company Tribunal (NCLT) in Mumbai in the Infrastructure Leasing & Financial Services (IL&FS) case. The NCLT late Friday had rejected the Government's plea for a three-month moratorium for the stressed infrastructure financier its newly constituted board of directors. 

On Monday morning, NCLAT stayed the interim-order of the NCLT which had rejected the Ministry of Corporate Affairs's (MCA) request for a moratorium or protection against any regulatory and legal proceedings against IL&FS and its board, in case of further defaults. IL&FS defaulted on various debt instruments including loans, bonds and commercial papers (CPs), to the tune of over Rs 41 billion, as of October 1. 

Apart from staying proceedings against the company coercing this plea, the NCLAT has ordered a stay on suits filed by any party or bank or company against IL&FS and its 348 subsidiaries. 

Until the next hearing slated on 13 November, 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. 

NCLAT also ruled that bankers and financiers of IL&FS and its subsidiaries are barred from excreting their right to set-off their dues against current accoutres and other deposits that the company(s) have, a copy of the order states. 

Further, the appellate tribunal has asked 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 the interpretation 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 Mumbai is of the option that a “blanket” moratorium against all 348 subsidiaries and associate companies cannot be passed, as powers under Section 242 of the Companies Act can only be exercised when a company’s conduct has been prejudicial or oppressive to its member(s), the company itself or to the public interest.

The order by Justices Ravikumar Duraisamy and VP Singh stated that, "the tribunal [NCLT] has exercised this power under Section 242 of the Companies Act 2013 on being satisfied that the affairs of the company is mismanaged, therefore the then existent board of [IL&FS] was suspended and the nominated directors were appointed on the recommendation of the Government."

Therefore, was what happened at IL&FS 'mismanagement' or 'prejudicial' to its very own interests as a company, a systemically important NBFC and to the interests of other market participants and the public at large? 

For now, the NCLAT has stayed all legal and financial-recovery action by any party and creditor against the company.

Some of the groups' companies are already undergoing the Corporate Insolvency Resolution Process of the Insolvency and Bankruptcy Code (IBC), therefore even if the MCA sought to move for protection under the 'moratorium' powers of the IBC, the code by its very nature does not apply to financial institutions like IL&FS.  

Banker have claimed that 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 is in need of Rs 35 billion in liquidity support as it has Rs 40 billion worth debt and bonds coming up for redemption in the coming weeks. This prompted the MCA to move the NCLT for ‘protection’ as the new board is open to commercial suits moved either by creditors, shareholders, regulators and state-authorities.

The stressed non-banking finance company (NBFC) already has several commercial suits filed at different courts and tribunals across 'pan-India, said the NCLT in its Friday order. Two of which are with the NCLT namely, Small Industry's Development Bank of India  against IL&FS Financial Service, and another  by Enso Rail Infrastruces against IL&FS Rail.

Around 49 creditors, including bond-holders, are said to have sent letters to IL&FS, its Vice Chairman Hari Sankaran, and group companies.

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

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 petitioner has contended that that effectively implement the directors of this tribunal, the newly appointed Board of Directors required that status-quo be preserved qua the business and assets of [IL&FS] and its group companies,” the tribunal stated in its order. 

The government had moved the Mumbai NCLT on October 1, which dissolved the old board of IL&FS and reconstituted the board of directors with government nominees.