Ex-promoters can't hold stake in insolvent firm, says Supreme Court

In March 2022, the NCLAT dismissed an appeal filed by the Singhals that challenged the October 2021 NCLT order that asked the promoter group to sell their 25 mn shares at Rs 2 a piece to Tata Steel

The Supreme Court closed the doors on defaulting promoters looking to keep a residual stake even after their company is sold off under the insolvency process, the BusinessLine reported.

While hearing the Bhushan Steel case, where the promoters were holding onto a 2.35 per cent stake even after Tata Steel acquired a 72.65 per cent stake in the company, the Supreme court ruled that ex-promoters cannot hold a stake in the insolvent firm.

Justice MR Shah and Justice Krishna Murari dismissed former Bhushan Steel promoter Neeraj Singal’s appeal against Tata Steel for the transfer of the residual shares. The two-judge bench observed that there is no ground for review order passed by the National Company Law Appellate Tribunal (NCLAT) which dismissed the appeal.

This move by NCLAT is seen as a positive development amongst the industry stakeholders as it will fastrack the process under the Insolvency and Bankruptcy Code (IBC). And also boost the confidence of new promoters looking to acquire stressed assets.

In 2017, the State Bank of India (SBI) took Bhushan Steel to court. The company owed Rs 59,000 crore to creditors. In May 2018, the NCLT approved Tata Steel’s Rs 35,000-crore resolution plan for the company. Subsequently, Bamnipal Steel, a subsidiary of Tata Steel issued a letter to ex-promoters calling upon them to sell equity shares. 

In March 2022, the NCLAT dismissed an appeal filed by the Singhals that challenged the October 2021 NCLT order that asked the promoter group to sell their 25 million shares at Rs 2 a piece to Tata Steel.

Calling the resolution plan "not workable", the SC reinstated the NCLAT order barring ex-promoters to continue as shareholders. 

“According to us, the resolution plan shall not be workable at all. At this stage, it is also required to be noted that the appellants are the erstwhile promoters and therefore they cannot be continued to be in the company in any capacity may be as shareholders as rightly observed by the NCLAT,” the Supreme Court order read.

A resolution plan is a key document that determines the future liability as well as rights of the outgoing promoters on their shareholding in the company.