The Mumbai bench of the National Company Law Tribunal (NCLT) has said that the law banning promoters who are defaulters from bidding for their own company is not applicable to cases filed before November 23, 2017.
In a somewhat surprising ruling, the Mumbai bench of the National Company Law Tribunal (NCLT) has said that the law banning promoters who are defaulters from bidding for their own company is not applicable to cases filed before November 23, 2017. The amendment to the Insolvency and Bankruptcy Code (IBC) that banned such bidding was gazetted on November 23, so the Mumbai bench of the NCLT has ruled that it does not apply to cases filed before that. But, the ordinance makes it clear that this ban applies to all cases, not just those filed after November 23. While the law is clear, it is nonetheless important that the government appeals this ruling in a higher court and gets it quashed. Leaving the interpretation of the Mumbai bench unchallenged, even if legal experts are convinced the judge’s reading of the legislation is incorrect, would be unwise.
Clause 4 of Section 30 of the November amendment to the IBC says that the committee of creditors “shall not approve a resolution plan submitted before the commencement of the IBC (Amendment) Ordinance, 2017, where the resolution applicant is ineligible under Section 29A …” In an addendum to this, the law notes that where the resolution applicant is ineligible, he would be allowed to settle the dues within 30 days time. Section 29 (A) clauses (a) and (b) were added, by way of an ordinance, to the IBC to specifically keep defaulters, wilful and otherwise, from bidding for their own companies. The spirit of this section would be altogether violated if defaulters—described in the law as those whose account is classified as non-performing for more than a year and who have failed to make the payment of all overdue amounts with the interest thereon—are given a chance to get back their companies, and at a whopping discount at that, in the bidding process.In one instance, it turned out that a close relative of the promoters was an ultimate beneficiary of the bidding entity through various holding companies and trusts. The ownership of the bidding entity is understood to have been later changed such that the close relative was no longer a beneficiary, ostensibly, because of apprehensions that the bid would have been declared ineligible. The short point is defaulter-promoters will try hard to get back control over their companies, something that the law wants to prevent and, consequently, there can be no ambiguity whatsoever. The changes to the IBC via the recent Ordinance of June 6, 2018, go a long way in plugging whatever loopholes are left. The exhaustive definition of the term “relative”, for instance, has been expanded and would keep promoters from using their kith and kin to bid for their companies.
The law, of course, does make an exception for smaller businesses and allows promoters of MSMEs to bid for their companies. While there are those who have frowned on this, pointing out it could lead to malfeasance, the reality is that these assets would not attract buyers and would probably be sold as scrap. That would be a destruction of valuable assets. The government deserves due credit for not having succumbed to pressures from defaulting firms and being pragmatic so that businesses are not shut down unnecessarily and banks are able to recover some of their dues. In this context, allowing pure-play financial entities that have deep pockets to invest in sick companies is a good move and will allow for better price discovery in the corporate insolvency resolution process (CIRP). Lowering the voting threshold for creditors to 66%, from 75%, is another pragmatic move which will prevent a handful of lenders from disrupting the process and pushing the company towards liquidation. Given the differences in opinions between NCLT benches, the law has also clarified that late bids will not be entertained.