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NCLAT allows promoters under liquidation settle with creditors

IANS  |  New Delhi 

Opening up a new window for promoters looking to retain control of their companies facing proceedings, the National Company (NCLAT) has held that shareholders and owners can reach a settlement with creditors when their entity is under and an has been appointed by the court.

The NCLAT order has far reaching consequences over resolution of stressed assets, especially those where promoters are seeking settlement post-initiation of proceedings in the National Company Tribunal (NCLT).

As per amendments made to the and Code (IBC), promoters are barred from participation in the resolution process of their stressed assets If at the stage, they are now permitted to file an application for approval of settlement with creditors, several promoters could jump at the opportunity as it would allow them to retain control of their respective companies while cleaning up the

The path breaking NCLAT order came on an appeal filed against the decision of the NCLT Mumbai bench. This bench had held that the application filed under Section 391 of the Companies Act 1956 (corresponding to Section 230(1), Companies Act 2013) could not have been moved by the shareholders after the appointment of

The NCLT reasoned that only the was entitled to represent the company under and formulate or approve any scheme of settlement.

Section 391 of Companies Act, 1956, deals with the "Power to compromise or make arrangements with creditors and members". This is similar to provisions in section 230 of Companies Act, 2013.

The NCLAT, however, held this view of the NCLT to be erroneous after referring to judgements of the and several High Courts.

The held : "Liquidator is only an additional person and not exclusive person who can move application under Section 391 of the old Act when the company is in liquidation. Looking to these Judgements, we are unable to support the view taken by NCLT that the Appellant could not have filed the Petition under Section 391 of the old Act".

In this matter, the of Ltd had filed a scheme of compromise in winding up proceedings before the Bombay earlier where Liquidator had already been appointed. The matter was transferred to the NCLT Mumbai bench on the basis of a notification dated December 7, 2016.

"We will have to see whether the NCLAT ruling in the case sets a precedent as in this case the winding up process was already up for approval in NCLAT has also said that settlement application given by promoters will be decided by the and would be accepted by NCLT," said a legal expert not willing to be named.

While NCLAT has said that it had no doubts over the applicability of a scheme of compromise and arrangement even when the liquidation process is on, NCLT could accept or reject the offer of settlement under the provisions of Companies Act.

Legal experts, however, say this could open the way for a fresh resolution even when a company is being liquidated, by giving the opportunity to the promoters to come up with a viable plan.



(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Tue, April 16 2019. 15:46 IST