Promoters can take part in liquidation process if lenders okay IBC exit

Promoters can take part in liquidation process once their companies are out of the purview of the Insolvency and Bankruptcy Code (IBC), a senior government official told Business Standard. 

Section 29A of the IBC does not allow non-performing asset (NPA) holders, including promoters, to take part in the resolution process. However, taking creditors on board, even defaulting promoters can enter into settlement of dues under Section 230 of Companies Act. Section 230 of the Companies Act gives promoters’ power to make arrangements with creditors and other members. Such a provision would, however, apply only after the company’s insolvency resolution application has been withdrawn by the support of 90 per cent of the lenders under Section 12A of IBC, which allows debtors another chance to retain control over a firm even after a case is admitted to the National Company Law Tribunal.

“There cannot be a situation where you are abusing the process and getting a wrongful gain. But there can be a situation where there is nothing better at all… Then it a conscious decision that 90 per cent are endorsing and then you come out of the system,” the official said. “Once you are out of insolvency process, IBC does not apply to you. Under Companies Act, you are allowed to enter liquidation as a promoter.” Anshul Jain, partner, PwC, said: “Value maximisation should be the underlying objective in the entire process. If the process under Section 230 helps achieve a higher value for the asset, the regulatory framework should enable it.”

Fate of several companies is hanging in the balance as defaulting promoters approach the NCLT to settle dues with creditors. In May, the Mumbai Bench of the NCLT had rejected Sterling Biotech’s application for withdrawal of insolvency plea and passed a liquidation order. The Bench had questioned the lenders on accepting a deal from absconding promoters. The NCLAT, however, stayed the liquidation order after an appeal by the banks this month. 

Experts feel defaulting promoters might misuse the Companies Act provision to get a backdoor entry into their firms. “The Section 29A of IBC and Section 230 of Companies Act are conflicting in spirit, not in the letters of law. Both laws are working at cross purpose,” a legal consultant said.  About 99 stressed firms have opted for withdrawal of resolution applications under Section 12A and over 400 have gone for liquidation. 

“Liquidation has happened in cases where there is negligible value left,” the senior government official quoted earlier said. 

The government is expecting that the current trend of liquidation overtaking resolution will get reversed and the huge backlog of distressed assets will be cleared in the next few years.   

The Insolvency and Bankruptcy Board of India has proposed changes in liquidation norms to provide defaulting promoters a chance to file for a compromise or arrangement in event of liquidation.