Supreme Court does well to shut out unscrupulous promoters

By: |
March 19, 2021 6:00 AM

While the IBC rules out such promoters trying to retain control, some tried a comeback via the Companies Act

Given how errant promoters go to any lengths to try and retain control over their companies even after bankruptcy proceedings have been initiated, the ruling sets the right precedent.Given how errant promoters go to any lengths to try and retain control over their companies even after bankruptcy proceedings have been initiated, the ruling sets the right precedent.

The Supreme Court has done well to shut the back-door on mischievous promoters trying every trick in the book to be able to hold on to their bankrupt businesses. In a recent verdict, the apex court made it clear that a person ineligible under IBC (Insolvency and Bankruptcy Code) to file a resolution plan can’t take recourse to the Companies Act to do so. It asserted that Section 230 of the Companies Act, 2013 that allows anyone to propose a “scheme of compromise or arrangement” with the companies’ creditors should be interpreted in the spirit of the IBC. The bench led by Justice DY Chandrachud observed: “The purpose of the ineligibility under Section 29A is sustainable revival and to ensure that a person who is the cause of the problem cannot be a part of the process of the solution”.

The ruling is a very significant one because it reinforces the spirit of the IBC, a brilliant and a long-overdue piece of legislation for the financial sector. The recent case related to the promoters of Gujarat NRE Coke, who challenged a specific provision saying that anyone disqualified by the IBC could not use Section 230 of the Companies Act instead to propose a resolution plan. The SC observed that Section 230 of the Companies Act could not override Section 29A of the IBC, which prevents promoters from bidding for their own companies. “…we find that the prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC must also attach itself to a scheme of compromise or arrangement under Section 230 of the Act of 2013, when the company is undergoing liquidation under the auspices of the IBC,” the court ruled.

Given how errant promoters go to any lengths to try and retain control over their companies even after bankruptcy proceedings have been initiated, the ruling sets the right precedent. It is, no doubt, possible that, in some instances, the company might have fallen on hard times for no fault of the promoter but due to other circumstances. And, thus, there could well be a case for allowing the promoters to try and revive the business.

However, at the end of the day, those accountable for the failure of the business must pay for it. Allowing exceptions would not be desirable as there is every chance of these being misused. As we have seen, there have been several instances of promoters trying to delay the corporate insolvency resolution process (CIRP) and even stall it on the flimisiest of pretexts. Some have magically produced large sums of money at the eleventh hour. Some pursue the matter even after the resolution has been completed and the company has been taken over by another businesses house. This is a waste of the courts’ time. Consequently, every loophole needs to be plugged.

The code enables speedy resolution of sick companies and allows for capital to be freed up and put to work. To be sure, the specified timelines have been breached, but that is to be expected with any significant new law. Also, it is true that lenders have needed to take big hair-cuts, with the realised value of the share of admitted claims at a little over 40%, but several large companies—Essar Steel, Bhushan Power—have found strong new owners who can resuscitate the business. More than 4,000 companies have found their way to the bankruptcy courts, and the SC’s decision will give operational and financial creditors the confidence to take action against errant promoters.

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