Role of Promoters under IBC by Harshit Mishra

Role of Promoters under IBC

By Harshit Mishra
B.A.LL.B Hons., L.L.M, Corporate Law,

KPMSOL, NMIMS, Mumbai

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) is India’s bankruptcy law that aims to simplify the existing framework by creating a single insolvency and bankruptcy rule. The bankruptcy code is a one-stop solution to address insolvencies that was previously a lengthy process that did not offer an economically viable solution. The code aims to protect the interests of small investors and makes the process of doing business less cumbersome. Since its implementation in 2016, the Code has been evolving at a fast pace and has widened the scope of creditors involvement in the restructuring of a company.

 

In the Indian corporate scene, promotors play an important role in the functioning of a company. They are the one who come up with the idea of creating the company and thus play an influential role with respect to others. The promoters stand in a fiduciary relationship with the company and by virtue of this relationship they owe a duty of loyalty, care and protection towards the company. However, despite this, there are time when the company fails to stand strong and repay its obligations and thereby goes into debt. Now, when a company makes a default in payment of dues, CIRP is initiated to revive the company, failing which it goes for liquidation. Under the CIR process, ‘resolution plan’ is put up by the ‘resolution applicant’ who suggests the maximization of the value of assets of the company in order to revive the company and save it from liquidation. Now, earlier it has been seen that if the defaulting promoter of the ailing company is allowed to put up a resolution plan he would submit resolution plan at substantially discounted rates. Thus, now the law has been changed by way of certain amendments and now a defaulting promoter, along with various others mentioned in section 29A, have been made ineligible to be a resolution applicant.

 

Having said that, it’s not always the case that a debtor tries to defraud the creditor and works with an ill-will and thus there needs to certain provisions in law to avail the promoters of the ailing company a chance to regain its control. Also, the working of a company is a complex matter and not everyone is well versed with it and thus promoter is the most suitable person for the smooth functioning of the company. It is this reason that certain provisions are there in the IBC which avails an opportunity to the company to regain control by way of withdrawing the application admitted under section 7,9 or 10 of the IBC or by way of a compromise made under section 230 of the Companies Act, 2013.

However, it is feared by the experts that 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.

 

 Who is a Promoter ?

 The whole process of formation of company may be divided into four stages namely;

  1. Promotion
  2. Registration
  3. Raising of Capital
  4. Commencement of business.

Here, Promotion is term of wide import denoting the preliminary steps taken for the purpose of registration and floatation of the company. The person who assumes this task of promotion are called promoters. A promoter may be an individual, syndicate, association, partner or company.1

In legal sense, the term promoter is defined under section 2(69) of the Companies Act, 2013 as a person;

  1. who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92;
  2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
  3. in accordance with whose advise, directions or instructions the BoD of the company is accustomed to act.

If we talk about the role of a promoter, with respect to the formation of a company, he could be defined as a person who brings about the incorporation and organisation of the corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscriptions, and sets in motion the machinery which leads to the formation itself. Therefore, the term ‘promoter’ has no definite meaning. Whether a person is a promoter or not is a question of fact in each case.

The position of promoters in relation to the company was explained by Lord Cairns in “Erlanger v New Sombrero Phosphate Co.”2 in the following words:

They stand, in my opinion, undoubtedly in a fiduciary relationship with the company. They have in their hands the creation and moulding of the company. They have the power of defining how and when, in what shape and under what supervision the company shall start into existence and begin to act as a trading company. Here, the chief duty of the promoter as a  fiduciary agent is to disclose to the company (BoD) his position, his interest and profit in the property which is subject of purchase or sale by the company.

In case the promoter of the company fails to make full disclosure at the time the contract was made the company may either:

  1. rescind the contract and recover the purchase price where he sold his own property to the company, or
  2. recover the profit made, even though rescission is not claimed or is impossible;
  3. claim damages for breach of his fiduciary duty.

The Companies Act, 2013 provides the following provisions with respect to liabilities of the promoter, such as;

  1. Section 26 enumerates the matter that should be stated and the reports that should be set out in the prospectus.
  2. Section 35 provides for civil liabilities for any misstatement made in the prospectus.
  3. Section 34 contains provisions relating to criminal liabilities for issuing a prospectus which contains untrue statements.3

Thus, from the above discussion it can be said that a promoter performs a very important role in the formation of the company and even after the company comes in to existence a promoter may take the post of the director, or he may indirectly control the company. Also, since the promoter knows about the business of the company from its roots he deserves some say  in the restructuring of the company when the company is not performing well, provided he acts in a fair and reasonable manner and not with an intent to defraud.

 

What is CIRP?

The present code consolidates and amends the laws relating to the reorganization and insolvency of corporations, partnerships and individuals. It seeks to achieve reorganization and, failing that, liquidation of the concerned entity. The code makes some fundamental changes to the existing insolvency resolution process, procedurally as well as substantively. Unlike the SICA, which relied on the test of erosion of net worth to determine sickness, the code prescribes an objective test- that of payment default in respect of a debt. As per IBC an application for CIRP can be initiated upon the occurrence of a payment default, in respect of a debt of at least 1 lakh, before the NCLT.

One of the features of the code is that it relies heavily on processes and the administrative setup to ensure flow of information and resolution of issues in a time bound manner. The code envisages the establishment of a new institutional framework including IUs, IBBI, IPAs and IPs. Financial creditors are required to submit financial information and information relating to secured assets, as specified by the regulations, to the IUs.

Initiation of CIRP

Any financial creditor can file for CIRP even if the default is in respect of debt of another financial creditor. An operational creditor, on the other hand, is required to deliver a demand notice on the corporate debtor and the CIRP application can be filed only if the corporate debtor does not dispute the debt within 10 days of the delivery of such notice of demand. The CIRP has to be completed within a period of 180 days from the date of admission, which may be extended by a further period of 90 days by an order of NCLT. Upon the admission of application for CIRP , NCLT shall by an order declare a moratorium in respect of the corporate debtor including, among others, in respect of institution/ continuation of suits or proceedings or execution of any judgement or order against the corporate debtor; any transfer, disposal or encumbrance of its assets by the corporate debtor; and any foreclosure or enforcement of security interest including those prescribed under the SARFAESI Act.

Further, if the CRP is rejected or not approved in a time bound manner, if the resolution plan is not complied with or if the CoC so recommends, NCLT  shall order for the liquidation of the company and make a public announcement.

 

Role of Promoter in CIRP

Now moving on to the role of promoter in corporate insolvency resolution process. The Insolvency and Bankruptcy Code, 2016 is considered as one of the seminal reform introduced by the Government for the purpose of facilitating a time-bound process for revival or else liquidation of business entities. The paradigm shift of ‘debtors in possession’ to ‘creditors in control’ has shaken the corporate world and made the promoters sit and take notice of the shifting ground under their feet. This model puts tremendous pressure on the debtors. If they do not perform well and they do not honor commitments, there is a big fear that the entire control and resources move from the debtor to the creditor. In the scheme of things under the Code, an eligible resolution applicant submits a resolution plan to revive the ailing Corporate Debtor.  

Here, on occurrence of a default, an application is made before the NCLT for CIRP. On receipt of the application the NCLT is required to ascertain the existence of a default. If the application is admitted the NCLT is required to declare a 180 days moratorium. Thereafter, the administration of affairs of the company is put into the hands of the Interim Resolution Professional. The IRP is given wide powers under the code including taking custody and control of all assets of the debtor, exercising powers of Board of Directors, Promoters etc. After collecting the claims of different creditors, the IRP is required to constitute a Committee of Creditors. After its formation, the CoC can either change the IRP or they can appoint a new IRP based on a majority vote. The CoC has the primary function of approving a resolution plan with respect to the debtor by 66% majority (earlier 75%). This entire CIRP is to be completed within 180 days from the date of initiation CIRP which can further extend up to 90 days under certain circumstances.

Thus, it is true to say that IBC brings about a paradigm shift in the recovery and resolution process by introducing the concept of ‘creditor in control’ instead of ‘debtor in possession’. This encourages value enhancement of the corporate debtor as once this process starts, the board cedes control of the company, and insolvency professionals with the help of advisors start managing the company. Creditors now have guidelines that clarify details till the last mile, including distribution of recovery proceeds.

Now, a question arises here that whether a promoter has any control when the company of which he is a promoter goes under CIRP to save the company.

To this there is no exact answer because there have been cases earlier where a promoter of a company has been allowed to put up a resolution plan and their resolution plan has been approved by the CoC, whereas, recently there have been cases where the promoters have not been allowed to put up a resolution plan for the restructuring of an ailing company, which has been put into this condition by the promoters only. To understand this, we should first check whether the promoter of the concerned corporation is even eligible to put up a resolution plan as per the relevant provisions of IBC, 2016.

With respect to this, Section 5(26) of the Code defines ‘resolution plan’ as a plan proposed by any person for the insolvency resolution of the corporate debtor as a going concern in accordance of part 2 of IBC.4 Further, to answer the question as to who prepares the resolution plan, Section 30(1) provides that a ‘resolution applicant’ is required to submit the resolution plan to the resolution professional. It is prepared on the basis of the information memorandum given by the resolution professional.5

Resolution plan is designated to be the “way-out” for insolvent entities coming under the Insolvency and Bankruptcy Code, 2016. As discussed above, the resolution professional appointed by the adjudicating authority constitutes a committee of creditors, invites resolution plans from prospective resolution applicants, and places the resolution plans before the committee of creditors. The resolution plan which is approved by the committee of creditors is submitted to the adjudicating authority for sanction. A resolution applicant, as defined under section 5(25) of the Code, earlier referred to mean any person who submits a resolution plan to the resolution professional. Hence, a resolution applicant might have been any person- a creditor, a promoter, a prospective investor, an employee, or any other person. This became a fatal loophole in the law which allowed back-door entry to defaulting promoters at substantially discounted rates for the assets of the corporate debtor.

To curb such unfair practices, several amendments were made in the Code, first by way of Insolvency and Bankruptcy Code (Amendment) Ordinance, 20176 dated 23rd November, 2017, then by Insolvency and Bankruptcy Code (Amendment) Act, 20187 dated 19th January, 2018 (“Amendment Act”). Of all the amendments, the one which has become a riddle for all is section 29A. The section specifies persons not eligible to be resolution applicant. These layers of section 29A are more in the nature of elimination rounds.

Vide the Amendment Act, the definition of “resolution applicant” was amended so as to mean a person, who individually or jointly, submits a resolution plan to the resolution professional pursuant to the invitation made under section 25(2)(h).8

Here, Section 25(2)(h) requires the resolution professional to invite resolution plans from prospective resolution applicants who fulfill criteria as laid down by the resolution professional with the approval of committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified by the Board.

Section 29A is a restrictive provision- any person falling in the negative list is not eligible to submit a resolution plan.

Therefore, a person in order to be eligible to submit a resolution plan –

  • shall fulfill the criteria laid down by the resolution professional with the approval of the committee of creditors; and
  • shall not suffer from any disqualification mentioned under section 29A.

Here, it’s important to look at the layers of elimination provided under Section 29A;

Under section 29A, a person suffering from the disqualifications as mentioned hereunder shall not be eligible to submit a resolution plan. Further, any other person acting jointly or in concert with the prospective resolution applicant shall not be covered under the following disqualifications –

  1. the person is an undischarged insolvent;
  2. the person is a willful defaulter in terms of the RBI Guidelines issued under the Banking Regulation Act, 1949;
  3. the person has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with RBI Guidelines issued under the Banking Regulation Act, 1949 and at least a period of 1 (One) year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor: Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan;
  4. the person has been convicted for any offence punishable with imprisonment for 2 (Two) years or more;
  5. the person is disqualified to act as a director under the Companies Act, 2013;
  6. the person is prohibited by SEBI from trading in securities or accessing the securities markets;
  7. the person has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and an order has been made by the adjudicating authority under the provisions of the Code;
  8. a person who has executed an enforceable guarantee in favor of a creditor, in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under the Code;
  9. a person who has been subject to the above listed disabilities under any law in a jurisdiction outside India;
  10. connected persons, i.e. persons connected to the person disqualified under any of the aforementioned points, such as those who are promoters or in management of control of the resolution applicant, or will be promoters or in management of control of the business of the corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party of the above referred persons – exception has been carved out for scheduled banks, asset reconstruction companies registered with RBI under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and alternative investment funds registered with SEBI.

Here, the word “connected persons” appear in clause (j) of section 29A. A person who is connected to the persons as defined under the Explanation, shall be disqualified if the other person suffers disability under clause (a) to (i) of section 29A.

Connected persons” have been defined so as to include three categories –

  1. any person who is the promoter or in the management or control of the resolution applicant; or
  2. any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or
  3. the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii).

The definition can be analyzed as follows-

1. Clause (i) includes:

      1. promoter;
      2. person in the management; and
      3. person in control

of an ineligible resolution applicant. 

2. Clause (ii) basically seeks to debar persons from submitting resolution plans in which persons suffering from disabilities mentioned under Section 29A are proposed as promoters or in the management of or in the control of the corporate debtor during implementation of the resolution plan. It includes-

      1. would-be promoter;
      2. person, would-be in the management; and
      3. person, would-be in control

of the corporate debtor, who suffer from disqualification under section 29A.9

With reference to the above review, the NCLT, in the case of RBL Bank Ltd. v. MBL Infrastructures Ltd., considering the intent of the Ordinance, 2017, found that section 29A’s provision (h) is not to disqualify promoters as a class for submitting a resolution proposal. The aim is to exclude these class of people from providing a resolution plan, which may adversely affect the integrity of the Code processes because of their antecedents.

The Code was designed to find the best possible way out for an ailing entity- it was meant to be more inclusive in approach and there was definitely no intention to avoid promoters from submitting resolution plans.

However, the Apex Court, upholding the IBC tenets, recently in a case held that a promoter can’t bid for stressed assets. The Supreme Court in this case upheld all the contentious provisions of the Insolvency and Bankruptcy Code (IBC) and reaffirmed the spirit of the law to ban defaulting promoters from bidding for their own assets.10

Delivering the judgment on a petition filed by Bhushan Power and Steel promoter, Sanjay Singal, on Section 29A — which bans defaulting promoters from bidding for their stressed company, Justices RF Nariman and Navin Sinha said the provision of the bankruptcy law is legally valid and thereby upheld the law as to ineligibility of defaulting promoters from being the resolution applicant and putting up a resolution plan.11

Similarly, after a long-drawn battle that lasted for almost 900 days, the case of Essar Steel came to an end, with the Supreme Court setting aside the judgment of the National Company Law Appellate Tribunal (NCLAT) and upholding the decision of the Committee of Creditors (CoC) to allocate funds from ArcelorMittal’s Rs. 42000-crore bid to the creditors. In this landmark judgment, the Supreme Court upheld the jurisdiction of the Creditors Committee, which includes the bankrupt firms financial creditors over the distribution of claims. In the earlier case, the owners of Essar, Ruias, had offered to pay Rs. 54,389 crore to settle the matter outside the reach of the Insolvency and Bankruptcy Code (IBC) as they decided to “redeem the debt.”

“You cannot come in at the last minute with this offer. The right to debt redemption is not maintainable,” the National Company Law Tribunal (NCLT), Ahmedabad bench, said in the order. “…There is no illegality in the decision taken by the Committee of Creditors (CoC).” The CoC, led by State Bank of India, had in October last year approved the Arcelor-Mittal plan that envisaged paying Rs 42,000 crore to the lenders.12

 

How can a promoter regain some control under IBC?

The purpose of the 2016 Insolvency and Bankruptcy Code is to handle the asset deficit in an insolvency case in a manner fair to all the stakeholders. In Binani Industries Ltd. v. Bank of Baroda, the National Company Law Appellate (“NCLAT”) has dealt thoroughly with the Code’s objective and purpose. The Code gives primacy over’ Liquidation’ to’ Resolution.’ Resolution encourages optimizing the value of Corporate Debtor’s assets in order to encourage investment, credit access, and balancing all stakeholders ‘ interests, rather than allowing individual creditors to maximize their own interests.

Therefore, once an Insolvency Application was filed under the Code the process thereafter will have to ensure that the interests of all stakeholders are protected having regard to the objects and purpose of the Code.

However, it was seen that in a number of cases an applicant who had filed the Insolvency Application sought its withdrawal before such application was admitted (and in some cases even after its admission) after securing recovery of his / its debt. Any such recoveries obtained through settlements outside the court unduly favored the applicant to the exclusion / detriment of other creditors.13

Prior to the Introduction of Section 12A

The Code provided for withdrawal of an Insolvency Application under Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, provides: “The Adjudicating Authority may permit withdrawal of the application made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission.”

However, the Code was silent on whether an application once admitted could be withdrawn or settled by the corporate debtor. This issue arose for the first time in the case of Mother Pride Dairy India Pvt. Ltd. v. Portrait Advertising & Marketing Pvt. Ltd, where the NCLAT while interpreting Rule 8 held that-

“…once an application is admitted, it cannot be withdrawn even by the Operational Creditor, as other creditors are entitled to raise claim pursuant to public announcement under Section 15 read with Section 18 of the I&B Code, 2016.”

An appeal against the decision of the NCLAT was preferred to the Honorable Supreme Court by the applicant creditor. The Honorable Supreme Court while overturning the decision of the NCLAT accepted the settlement between the applicant creditor and the corporate debtor by exercising its inherent power under Article 142 of the Constitution of India.14.

 

A similar issue arose again in the matter of Lokhandwala Kataria Construction Limited v. Nisus Finance and Investment Managers, LLP15. In this case, the Financial Creditor approached the NCLAT for removal of Section 7’s application because of an out – of-court settlement with the corporate debtor, post admission of Section 7.  The NCLAT held that, in the absence of any infirmity in the admission process, such a settlement cannot conflict with the NCLT order accepting the Insolvency Request. The NCLAT did not consider this a suitable case for exercising its inherent powers under NCLAT Rule 11, 2016. The NCLAT held that while it was open to the Apex Court in the case of Mother Pride Dairy to consider a similar settlement using its discretionary power under Article 142 of the Indian Constitution, the NCLAT did not have that power and could therefore not disturb the NCLTs Order.

In view of the fact that a number of similar appeals were being filed before the Honorable Apex Court praying for the exercise of its inherent powers under Article 142 of the Constitution of India, the Court noted that there was a lacuna in the Code and the attendant Regulations. The Honorable Apex Court directed the Competent Authority to amend the law and made the following observations in Uttara Foods and Feeds Private Limited v. Mona Pharmachem16:

“We are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilize its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority so as to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached.”

The Insolvency Law Committee established on 16.11.2017, as a direct consequence of the Honorable Apex Court’s observations in “Uttara Foods” was tasked with the role of reviewing relevant issues in the administration of the corporate insolvency process to propose a solution to the problems of withdrawal of an insolvency application after admission. The Committee presented its report in March 2018 which analyses the aspect of settlement post admission of an Insolvency Petition in detail. The Report concludes that the proceeding post admission is not an individual one but a collective one. Therefore, any settlement and consequential withdrawal of insolvency proceedings have to be taken by the CoC collectively. It is for them to decide if the settlement offer by the Corporate Debtor will protect the interest of all the Creditors and hence, the CoC is best suited to discontinue the insolvency proceedings.

The Ordinance of 2018 received the assent of the President on August 17, 2018, with retrospective effect from June 06, 2018

Post introduction of 12A

The newly introduced Section 12A reads as follows:

12A. Withdrawal of application admitted under section 7, 9 or 10. – The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the CoC, in such manner as may be specified.

In order to complement section 12A of the Code, Regulation 30A of the Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Regulations), 2016 (CIRP Regulations) was inserted with effect from July 04,2018. Regulation 30A provides for the process of withdrawal/settlement post admission. A withdrawal is permissible until the time Expression of Interest is not published under Regulation 36A of CIRP Regulations.17

The Constitutional Validity of Section 12A was challenged before the Hon’ble Supreme Court in Swiss Ribbons v. Union of India18. The Apex Court while upholding the constitutional validity of Section 12A, explained two scenarios with respect to the withdrawal/settlement post admission of Insolvency Petition:

  1. pre CoC formation; and
  2. post CoC formation.

Before a CoC is formed, parties can approach the Adjudicating Authority for settlement, which in exercise of its inherent power under Rule 11 of the NCLT Rules, 2016 may allow or disallow the withdrawal/settlement. Post formation of CoC, it is the Committee which has to be consulted before the parties are allowed to settle and settlement can be allowed only if it has received ninety per cent voting approval from the CoC. The Apex Court also relied on the Insolvency Law Committee Report of March 2018 while explaining the high threshold of ninety per cent of Committee for approving the settlement. Furthermore, if the parties feel the decision of Committee is arbitrary they can approach the NCLT or NCLAT under Section 60 of the Code.

The Apex Court also clarified the position with respect to its findings in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal19:

“…that Regulation 30A(1) is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issuing the invitation for Expression of Interest under Regulation 36A.”

In the view of the above judicial pronouncements, CIRP Regulations were amended, vide Notification dated 25.07.2019, to allow withdrawal of application under section 7, 9 and 10 of the Code at any time; a) one before the constitution of the CoC b) after constitution of the CoC but before the invitation of the EoI or c) after the invitation of the EoI in exceptional cases, on application made by the applicant.20

 

Also, liquidation proceedings under IBC are now evolving into restructuring/rehabilitation proceedings by taking recourse to Section 230 of the Companies Act, 2013. Section 230 allows the liquidator of a company undergoing liquidation to file an application before the NCLT to seek sanction for a scheme of arrangement between the company and its creditors and, where applicable, its members. Similar provisions also exist in other jurisdictions, notably in the Companies Act 2006 of the United Kingdom (UK Act) and the Companies Act, 1967 of Singapore (Singapore Act).

 

The application of Indian provisions to debt restructuring schemes, particularly in respect of companies in liquidation, has been infrequent and has received less attention until recently. The National Company Law Appellate Tribunal (NCLAT) has turned the spotlight on the section in a series of orders beginning with S.C. Sekaran vs. Amit Gupta and Ors.. In this case, the NCLAT directed the liquidator, appointed under the IBC, to “take steps in terms of Section 230” for the revival of the corporate debtor before undertaking the sale of its assets.

 

A scheme under Section 230 can be filed by the liquidator, a creditor (or class of creditors), or a member (or class of members). When approved by the NCLT, the scheme binds the company, its members and its creditors. It is also possible for third parties to propose and contractually agree to be bound by a scheme of compromise or arrangement.

 

However, In  Jindal Steel and Power Limited v. Arun Kumar Jagatramka & Gujarat NRE Coke Limited21, NCLAT held, while a scheme under section 230 is maintainable for companies in liquidation under the Code, the same is not maintainable at the instance of a person ineligible under section 29A of the Code.

 

Conclusion

Promoter is a person who brings about the incorporation and organization of the company. He brings together the persons who become interested in the enterprise. Therefore, it’s true to say that a promoter holds a very important place in the company and his role is imperative in the smooth functioning of the company as nobody understands the work of the company better than the promoters who turn this idea of formation of the company into reality. Thus, a promoter stands in a fiduciary relationship with the company and by virtue of this relation he owes a duty of loyalty, care and protection towards the company.

 Now, when a company makes a default in payment of dues, CIRP is initiated against such defaulting company by the creditors or by the debtor itself for the restructuring and revival of the company, failing which it goes for liquidation. Here, the purpose of CIRP is to revive the ailing company and focus on maximization of value of its assets so that the company is not liquidated and the entrepreneurial spirit is not killed. Now, the whole debate which arises here is about whether a promoter should be given any control when a company goes under CIRP or not because it’s reasonable to allege that it’s the insiders only who are responsible for the collapsing of the company and therefore they should not be allowed to put up a resolution plan. Here ‘resolution plan’ is designated as a way out for insolvent entities coming under IBC. But since Section 5(25) of the code earlier defined ‘resolution applicant’ as any person who submits ‘resolution plan’ to ‘resolution professional’, it allowed entry to defaulting promoter to submit resolution plan at substantially discounted rates.

In order to curb such practices certain amendments were made in the code to exclude defaulting promoters from being a resolution applicant, such as, section 29A of the Code. Also, definition of resolution applicant was changed to, any person who individually or jointly with others submit a resolution plan pursuant to an invitation made under clause (h) of sub section (2) of Section 25.

Nevertheless, it’s not always the case that a promoter has an ill-will to defraud the creditors and therefore there has been provided certain provisions in law under which a promoter can regain control of its company which is facing bankruptcy proceedings, for instance, Section 12A provides for “withdrawal of application admitted under section 7,9 or 10 of the code, and further, section 230 0f the Companies Act, 2013, which provides for compromise or arrangement of companies. However, Currently, neither Section 230 of the Companies Act, nor the IBC/Liquidation Regulations extend the application of Section 29A of the IBC to schemes under Section 230. This may lead to a situation where persons (including promoters) who were ineligible to submit a resolution plan in the CIRP, may wish to propose a scheme under Section 230. 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.

 

Disclaimer:

The Opinions expressed in this article are that of the author(s).The facts and opinions expressed here do not reflect the views of http://www.ibclaw.in.

The opinions expressed herein are those of the contributors (which shall, for these purposes, include guests) in their personal capacity and do not, in any way or manner, reflect the views of the organizations that the contributors are presently associated with, or that have previously employed or retained the contributors. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

  • : Harshit Mishra
  • : B.A.LL.B Hons., L.L.M, Corporate Law, KPMSOL, NMIMS, Mumbai

References   [ + ]

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8. IBC, 2016 (Act 8 of 2018) S 25(2)(h).
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10. http://vinodkothari.com/2018/02/section29a-ibc-a-net-too-wide/#_ftn1
11. Bhushan Power and Steel v PNB (IB)202- PB/2017 https://www.thehindubusinessline.com/companies/apex-court-bans-founders-from-buying-back-bankrupt-companies/article26087833.ece
12. CoC of Essar Steel Ltd. V Satish Kr Gupta and Ors. On 15th Nov. 2019 https://economictimes.indiatimes.com/industry/indl-goods/svs/steel/nclt-rejects-promoter-ruias-settlement-bid-for-essar-steel/articleshow/67742593.cms?from=mdr
13. https://taxguru.in/corporate-law/ibc-2016-section-12a-opportunities-obstacles-resolution.html
14. Mother Pride Dairy India Pvt. Ltd. v. Portrait Advertising & Marketing Pvt. Ltd
15. Lokhandwala Kataria Construction Limited v. Nisus Finance and Investment Managers, LLP, Civil Appeal No. 9279 of 2017 (Supreme Court, 20.11.17). https://taxguru.in/corporate-law/ibc-2016-section-12a-opportunities-obstacles-resolution.html
16. Uttara Foods and Feeds Private Limited v. Mona Pharmachem, Civil Appeal No. 18520 of 2017 (Supreme Court, 17.11.17) https://taxguru.in/corporate-law/ibc-2016-section-12a-opportunities-obstacles-resolution.html
17. https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2019/Jul/CIRP%2025072019_2019-07-25%2020:15:02.pdf
18. Swiss Ribbons v. Union of India, W.P (C) 99 of 2018, (Supreme Court, 25.1.19) https://taxguru.in/corporate-law/ibc-2016-section-12a-opportunities-obstacles-resolution.html
19. Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal &Ors., SLP (Civil) No. 31557/2018(Supreme Court 14.12.18). https://taxguru.in/corporate-law/ibc-2016-section-12a-opportunities-obstacles-resolution.html
20. Sylona Mohapatra and Srishti Kapoor, “Opportunities and Obstacles of resolutions”, Taxguru, Oct. 10th, 2019
21. (Company Appeal (AT) No. 221 of 2018), vide order dated 24.10.2019

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