n a nutshell, the recent NCLT order has driven home the point that the Provident Fund dues payable by the Corporate Debtor – not being the assets owned by him but belong to the workers – are not included within the liquidation estate. The liquidation estate is realised, with the proceedings being distributed to the stakeholders under the waterfall mechanism in section 53 of the I & B Code. What does not form part of the liquidation estate cannot be appropriated or sold by the Liquidator and cannot be distributed to the stakeholders of the Corporate Debtor – which, if allowed, would amount to ‘unjust enrichment,’ not contemplated by law.
In the case of ‘Lalit Mishra Vs Sharon Bio Medicine’, it was held that the Personal Guarantor’s Right to subrogation is not an absolute right. Further, it was elaborated that the debt recovery of the Personal Guarantor would in fact be antithetical to the objective of maximization of assets by further encumbering the assets of the company. Moreover, it cannot to be denied that the Guarantors also had some involvement in the management of the company, which eventually led to such insolvency. In the recent judgment with respect to challenge of provisions related to Personal Guarantors in the ‘Anil Ambani case’ in 2019, it was held that the provisions in the code, specifically Section 14 and Section 31(1), have been structured in a way so as to indicate that the guarantor’s rights to subrogation cannot be taken away if in case he/she settles the debts of the Corporate Debtor before or during the CIRP, but before the passing of the Resolution plan. Post passing of the Resolution Plan, as per Section 31(1) of the Code, it shall be binding on all stakeholders including the guarantors.
The Code is evolving with time and every now and then interesting set of jargons come before the Ld. Adjudicating Authority(ies), which require harmonious interpretation to uphold the objective of the code. One such interesting question of law is when a liquidator files an application under section 9 of IBC, 2016 without taking prior approval from the Hon’ble Adjudicating Authority as required under section 33 (5) of IBC, 2016. This article seeks to examine the intention of the legislature in enacting sub-section (5) of Section 33 and the consequence of inadvertent non-compliance.
The Ordinance still went ahead and provided this exemption to MSMEs applying for pre-pack resolution process, thereby allowing promoters with NPAs to also participate in the resolution process. This, in the authors’ view, is a step forward in realizing the objective of introducing pre-pack insolvency. The idea is to allow the corporate debtors to retain control of the management and to ensure its revival, without having to undergo the lengthy insolvency process under the IBC. By allowing the promoters to remain in control of the resolution process by adopting the pre-pack route, the Ordinance prevents a huge drain in the already limited resources of the corporate debtor, therefore incentivizing the promoters to act in the best interest of the debtor. Considering that most MSME defaults do not meet the current threshold prescribed under the Code, and most resolution applicants are not interested in revival of distressed MSMEs, allowing the promoters of the MSMEs to submit resolution plans would maximize the survival rate of the MSMEs.
The interplay between the Code and the PMLA has been the focus of much discussion. The conflict between both statutes becomes evident from their respective provisions. The I&B Code aims at maximizing the value of the assets of the financial creditors during the corporate insolvency process. Whereas on the other hand PMLA acting as a loggerhead, provides for the confiscation of assets arising from or engaged in money laundering. This becomes a major hindrance for the resolution professional while considering assets for valuation during the corporate insolvency process.
The Insolvency and Bankruptcy Board of India (IBBI) has lately amended regulations concerning the backdoor entry of Ineligible Promoters. Under the amendments introduced to the liquidation process regulations, defaulting promoters who are barred from the resolution plan under section 29A of the IBC, cannot be a party in any manner to a compromise or arrangement of the corporate debtor under Section 230 of the Companies Act, 2013. However, if this provision is used to revive a company that is facing liquidation under IBC, the rules of 29A will apply in keeping with the intent of the law. The new amendment also aims to restrict secured creditors from selling or transferring assets of a company undergoing a liquidation process to any person barred from submitting an insolvency resolution plan.
Section 12A of the Code allows withdrawal of the application initiating the insolvency resolution process, provided the requisite number (90%) of votes are obtained in the COC meeting, and that the application is filed by the applicant creditor. However, the scope of the last criteria i.e., who can file a withdrawal application, is currently very restrictive. Under the extant framework, only the applicant creditor can initiate the process of withdrawing the application, which albeit a step in the right direction, only partially achieves the objective of the IBC. The following paper attempts to demonstrate that expanding the scope of the section by allowing the CoC to file a withdrawal application through the IRP/RP is not only in consonance of the objective of the Code but also necessary for the creation of a more efficient insolvency regime.
Section 29A, laid down a multi-layered disqualification shield that would disqualify even crucial stakeholders to bud for the revival of the Corporate Debtor. Therefore, with the Reliance Infratel Case, it can be observed that the Hon’ble Supreme Court took a lenient approach while deciding who would be taking control of the Corporate Debtor in the Future. While being cautious, it could be said that a middle ground could be achieved by permitting the promoters to bid for the Corporate Debtor, while ensuring that there are enough safeguards available for the latter. The ultimate aim should always be to revive the company and avoid liquidation to preserve the right of both, the Corporate Debtors and Creditors.
Selling of the Corporate Debtor can be considered to be a route to expediate the process of liquidation. This would also ensure the retaining of the employees and maintaining employability. A company, if sold as a going concern, provides the acquirer an opportunity to revive the company without it being non-existent. However, it can also be stated that since, the term “Going Concern” has not been defined in the Code, this leaves an enormous amount of burden on the Adjudicating Authorities as they are the ones to interpret the term from case to case.
There is no excerpt because this is a protected post.