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IBBI Bars Promoters From Buying Back Companies Through Liquidation

The Insolvency and Bankruptcy Board says no to promoters looking to find a way back into companies via liquidation.

 A person pulls down the shutter of a shop. (Photographer: Abhijit Bhatlekar/Bloomberg News)
A person pulls down the shutter of a shop. (Photographer: Abhijit Bhatlekar/Bloomberg News)

The Insolvency and Bankruptcy Board of India has amended the norms governing liquidation of a company under the Insolvency and Bankruptcy Code, 2016 and barred promoters from participating in the process at any level.

According to the changes brought in by the bankruptcy regulator, a person barred from submitting a resolution plan under the insolvency process cannot enter into any scheme of compromise of debt with the lenders. The revised norms also say that banks cannot sell their security interest to such persons in bilateral deals either.

The amendments are the result of a consultative process initiated by the IBBI in November 2019. At the time, the regulator had issued a discussion paper and had sought comments from stakeholders on how to deal with bidders barred under Section 29A of the IBC, if they wish to participate in the liquidation process.

The discussion paper had also listed ways in which the liquidator will manage the liquidation process and ensure that creditors are paid according to the waterfall scheme prescribed in the code.

The IBBI-led amendments will impact how compromise schemes are currently being worked out. More specifically, it will close the door on promoters who are ineligible to bid during insolvency but can use the company law route to reacquire an insolvent asset at a discount.

Section 29A of the IBC lists eligibility criteria for bidders. Promoters of defaulting companies are barred under this section from submitting a resolution plan for the insolvent company. But, under Section 230 of the Companies Act, a promoter or stakeholder in a company is allowed to enter into a scheme of compromise or arrangement with lenders, to try and buy back the company.

In the insolvency resolution proceeding against Servalaxmi Papers Ltd., the promoter Shivram Prasad had proposed a scheme of arrangement after no resolution plan was approved by the committee of creditors. The Chennai bench of the National Company Law Tribunal had rejected the scheme, citing Section 29A of the IBC. The NCLAT, however, held that the purpose of the code is to maximise value and let the company continue as a going concern. Thus, the liquidator was required to consider a scheme of arrangement proposed by the promoter and initiate sale only if that failed.

Similarly, in the case of Gemini Communications Ltd., the appellate tribunal had directed the liquidator to consider a scheme of compromise proposed by the company’s promoter, who was willing to pay Rs 30 crore to buy back the company as opposed to a liquidation value of Rs 3 crore.

Section 230 of the Companies Act requires at least 75 percent of the committee of creditors to vote in favour of the scheme of arrangement, and an auditor to give the plan a seal of approval, stating that it will nurse the company back to health.

According to Suharsh Sinha, partner at law firm AZB & Partners, this company law window was available to promoters, allowing them to return during the liquidation stage and make a proposal to take back the company at discounted debt.

“It would have gone against the spirit of IBC, which seeks to keep the promoter barred by Section 29A out of the resolution process,” Sinha told BloombergQuint. “Allowing them to come back via a scheme during the liquidation scenario, then that’s a huge moral hazard and could lead to perverse incentives.”

RK Bansal, chief executive officer, Edelweiss Asset Reconstruction Company Ltd., said the IBBI’s stance on preventing financial creditors from selling their exposures to those barred by Section 29A is “slightly harsh”. The bankruptcy regulator’s amended rules go against the right of the promoter to buy back assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Act, he said.

“A promoter is allowed to buy back his assets under SARFAESI after settling his full dues,” Bansal said. “The promoter may alternatively participate in a transparent auction process and try to buy back the assets. These rules go against this, I feel.”

While the IBBI has tackled the issue of promoters finding a backdoor entry into companies, it has still not clarified the issue of time taken for the liquidation process to be complete. According to a senior state-run banker who spoke on the condition of anonymity, failure of the resolution process has already shown that bidders aren’t interested in purchasing the asset.

Once the norms bar promoters from participating in the bidding process, it’s unclear how long the liquidation process would continue, the banker said. However, since the changes made by the IBBI are on the regulations and the IBC hasn’t been amended, these norms could face legal challenges from creditors, the banker said.

What Are The New Norms For Liquidation Under IBC? Watch To Know More:

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