Liquidation Regulations: Wide-ranging, far-reaching changes to make liquidations faster, smoother

Vinod Kothari

(resolution@vinodkothari.com)

The attention that reforms in liquidation regulations has received, relative to what has gone in case of resolution, is far lesser than deserved, given the percentage of the resolution cases that slip into liquidation. Most of the major liquidations initiated 12 to 18 months ago are either making a very tardy progress, or are stuck into dead-ends. There were several needed changes in the Liquidation Regulations, and it is so very heartening to see the IBBI announce the amendments vide the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019, concluding a consultation process that began almost 8-9 months ago. The best part is, the amendments have incorporated most of the useful suggestions that were made either in the roundtable meetings held across the country, several comments and write-ups[1], or subsequently in response to the Discussion Paper.

The amendments impose far stricter timelines on the liquidators, but at the same time, smoothen the processes for him, particularly by relying less on periodic valuations and removing the cap on the reduction of the reserve prices. The queer concept of going concern sale in liquidation has also been enabled by making clearer rules, by a creditor-driven process of defining the bundle of assets and liabilities that are to be transferred by way of a going concern. The concept of schemes of arrangement during liquidation has defined time limits now. Relinquishment of security interest too has a definitive timeline. The process of consultation by liquidators is also quite well defined. On the whole, attempts have been made to resolve most of the difficulties that were being encountered in the ongoing liquidation matters.

The major highlights of the amendments are as follows:

Liquidation costs on financial institutions

One of the major concerns in on-going liquidations is lack of liquidity. The liquidator finds the liquidation estate is either completely dry, or may get some cashflows, but the same may come after protracted time. In such cases, how does the liquidator meet the running expenses of the liquidation proceedings?

First of all, the word “liquidation costs” is now much better defined, with several inclusions. While, some of the inclusions in the definition may continue to raise questions – for example, “costs incurred….for preserving and protecting the assets, properties, effects and actionable claims, including secured assets, of the corporate debtor”, one must appreciate that the definition is now far more comprehensive than it was. This however, shall not include the costs incurred towards a scheme of compromise or arrangement under the Companies Act, 2013, if applicable. The same has been dealt with further in the article.

The amendment has to be read in synchronization with the newly inserted regulation 39B of the IBBI (Insolvency Process for Corporate Persons) (Amendment) Regulations, 2019

Further, the newly inserted provision in Reg 2A states that where the liquidation costs are estimated by the liquidator to exceed the realisations, the liquidator may call up “financial institutions” to contribute to the same, in proportion to their share in the “financial debts”.

“Financial institutions” is defined in section 3 (14) of the Code to include banks, NBFCs and public financial institutions.

The shortfall may be claimed by the liquidator on the basis of an estimate, within 7 days of the passing of the liquidation order. The timeline of 7 days seems impractical for several reasons – first, within 7 days of the passing of the liquidation order, it will be impossible for the liquidator to get an estimate of the recurring costs, more so when he may not have been resolution professional. Secondly, since the contributions are to be made in proportion to financial debts, the process of filing and admitting claims may not have begun at all at this time. Also, the applicability of this provision to existing liquidation matters will remain unclear.

Further, while demarcation on the basis of secured and unsecured financial creditors (read: institutions) remains unclear, it must also be noted that such contributions cannot be used for costs incurred in relation to compromise or arrangement u/s 230 of the Companies Act, 2013

This contribution by the financial institutions is akin to an interim financing during liquidation, as this contributions remains escrowed, and has a first claim on the liquidation waterfall, as a part of “liquidation costs”. However, inclusion of this financing as a part of liquidation costs results into a circular logic – the contribution itself is to fund liquidation costs, and it is a part of liquidation costs itself. That brings a complicated question of prioritisation within a particular clause of section 53 (1) – in this case, clause (a).

The strange and almost untenable conclusion of this is that whereas as shareholders have a limited liability and use default and liquidation as the option, so that they pay nothing over and above their equity in the company, lenders may run the prospect of having to lose all their debt, and yet end up paying for liquidation costs. Hopefully, lenders will realise the need for taking hard decisions, including, potentially, an action of striking off the name of the company after giving up their security interests and claims.

Resolution during liquidation – compromise and arrangement

The Appellate Tribunal in S.C. Sekaran v. Amit Gupta & Ors., referring to the order of the Hon’ble Supreme Court in Meghal Homes (P) Ltd. Vs. Shree Niwas Girni K.K. Samiti & Ors, has highlighted that liquidators may try to see if schemes of compromise or arrangement are feasible, even during liquidation. Notably, section 230 of the Companies Act, and corresponding provisions of the Companies Act, 1956, nay, UK Companies Act, 1948, have always enabled presentation of schemes of arrangement during liquidation by the liquidator.

The newly inserted reg 2B now provides that where a scheme of compromise or arrangement is proposed under section 230, “it shall be completed within ninety days of the order of liquidation”. It is unclear as to what is to be completed within 90 days. As is well known, there are several sequential steps in a scheme under section 230; –making of the scheme by the person wanting to present it, presentation of the scheme before the NCLT, ordering of meetings by the NCLT of members as well as creditors, if applicable, filing of report of the meeting of members and creditors with the NCLT, NCLT holding hearing on the application after getting feedback from the Regulatory Authorities, and finally, passing orders. In the present experience, the end-to-end time between filing of the first application till orders may be anywhere between 6 months or longer.

Logically, the reference to the timeline above is for filing of a scheme of compromise or arrangement, since the rest of the process is under the supervision of the NCLT.

Note that a scheme of compromise or arrangement involves sanction of both shareholders and creditors by stipulated majority under the Companies Act. Additionally, settled principles over decades require separate meetings of every class of creditors to approve the scheme. Resolution proceedings itself was a scheme of arrangement – that having failed, whether schemes of arrangement will provide the ability to a company to rise like a phoenix from its ashes, will remain to be seen.

Presumptive relinquishment of security interests

The earlier law did not clarify the point of time when the secured creditor has to make up his mind on whether to use the process of self-help sale of assets outside liquidation, under section 52, or to be a part of the liquidation proceedings by relinquishing security interest and claiming a priority as provided by section 53 (1) (b).

Insertion of Reg 21A now makes it clear that the secured creditor shall decide his options while filing the claim. If, within 30 days of the commencement of liquidation proceedings, the secured creditor does not intimate the option of selling the asset under section 52, the assets covered under security interest shall be presumed to be part of the liquidation estate.

Consultative process

Unlike during resolution, the settled principle in case of compulsory liquidation is that the proceedings are almost completely under the control of the liquidator, who works as an officer of the court. Section 35 (2) allows the liquidator to consult stakeholders, but in the same breath, it also says that the consultations shall not be binding on the liquidator.

In the past practice of winding up under the Companies Act, creditors’ intervention in compulsory liquidation came in form of advisory committee. In case of liquidations under the Code as well, while consultation was not mandated by law, but in practice, most major liquidations had consultation committee.

Insertion of Reg 31A now provides harmony to this so-far-arbitrary process of consultation committees.

  • First, the regulation mandatorily requires the liquidator to have a consultation committee, even though whether any or what matters will be put up for consultation is still largely governed by the provisions of section 35 (2).
  • Secondly, the composition of the multi-stakeholder consultation committee is now well-defined. This is markedly different from the present practice where most consultation committees were replicas of the CoC during CIRP. The consultation committee will have representatives from secured creditors, unsecured financial creditors, employees and workmen, operational creditors, government and shareholders. Quite obviously, the references to each of these classes is based on the claims filed by each class of stakeholders. For instance, the government will be there in the stakeholders’ list if the government’s claim is admitted.

Ideally, committees should consist of odd number of members, to avoid matters hitting a tie. Based on the table given in the Regulation, in most cases, secured financial creditors will have more than 50% of the total claims – hence, there will be 4 representatives from secured financial creditors, and one each from unsecured financial creditors, employees and workmen, operational creditors, government and the shareholders. The selection of the representatives of each class may be done by mutual consensus of the stakeholders in each class, but failing any such consensus, the highest claimants in the class shall be invited upon the committee.

  • Thirdly, the consultations in the committee will be decided upon by a vote of 50% of members present and voting. There are two important points to note – the voting is not by value, but by head count. Secondly, and thankfully, the voting rule is here to count only those present and voting. Therefore, no one can frustrate decision-making either by not coming to the meeting, or by not voting.
  • Fourth, while the consultations in the meeting are not binding on the liquidator, the liquidator has to state in writing the reasons for not agreeing with the advice given in the meeting.

Going concern sale

Insertion of Reg 32A addresses several of concerns relating to a going concern sale in liquidation. First and very important, there is a hard timeline of 90 days for deciding whether to go for a going-concern sale. 90 days starts running from the commencement of liquidation. Therefore, the applicability of this provision to existing liquidation proceedings becomes a challenge – particularly where there are ongoing attempts to cause a going concern sale. The stance of the Regulations is to have definitive timelines, so that indefinite time is not lost in recursive processes – first, seeing a going concern sale fail, and then opt for the other modes of sale, thereby elongating the time. Therefore, fairly speaking, this amendment should be applicable to existing liquidations with the 90 days’ timeline running from the date of the amendment.

Second, the confusion that prevailed with the version of the amendment circulated with the Consultation Paper – that liabilities will be transferred with the assets – has now been removed. The grouping of assets and liabilities that will form part of the going concern sale will be determined by the Consultation Committee, or by the liquidator.

Repetitive valuations and discretion to reduce reserve prices

There are several helpful amendments pertaining to valuations. First, valuation in liquidation is not mandatory, as, now, the regulations permit and not force the liquidator to have a valuation done during liquidation. The liquidator may either rely on the valuation done during CIRP, or opt for a fresh valuation. This will obviate the starting point to be the CIRP valuation, which has, in any case, been unsuccessful.

Secondly, the liquidator now has the discretion to keep reducing reserve prices for the auction – starting with 25% for the first failed auction, and then 10% thereafter. Going by the spirit of the Code, the subsequent reductions in value, if any, shall be by Written Down Value (WDV) Method.

Impact on on-going matters

Since the amendments are effective from the date of their publication in the Official Gazette, it seems that all amendments will impact ongoing liquidation matters as well, except in cases where specific carve-out has been given[2], or in cases where it is impractical to apply the amendment[3]. In their application to existing matters, the timelines laid in the Regulations may have to be read with reference to the date of the notification, rather than the commencement of liquidation, etc.

It will counter-purposive to take a stand that the amendments do not apply to existing liquidations – it should be noted that much of the move to amend the Regulations itself arose from the experienced difficulties in existing liquidations. New liquidations could not have been the subject matter of the Amendments, leaving existing liquidations unattended. However, as earlier mentioned, some of the timelines will have to be read as referring to the date of the amendment, rather than the date of commencement of liquidation.


[1] Many of the concerns expressed by the author, e.g., on computation of liquidation fee, relinquishment of security, the transfer of liabilities as a part of going concern sale, etc., have been addressed.

[2] For example, in relation to Liquidator’s fees, the Amendment Regulation shall not be applicable in relation to the liquidation processes already commenced before the coming into force of the said amendment Regulations.

[3] For example, the timeline of 1 year cannot be applied to matters which are more than 1 year into liquidation

Link to our other relevant articles

Amendment in Liquidation Regulations: Salient Features and Analysis

The Insolvency Amendment Bill, 2019: Highlights

IBC Amendment Bill, 2019: Will it bring distributive justice

LIABILITY OF GUARANTOR AND PRINCIPAL DEBTOR IS CO-EXTENSIVE AND NOT IN ALTERNATIVE

By Richa Saraf (legal@vinodkothari.com)

In the case of Sanjeev Shriya v. State Bank of India & Ors.[1], the Hon’ble Allahabad High Court has barred parallel proceedings in Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT). Below we discuss the implications and analyse the judgment:

Read more

Swiss Ribbons SC ruling: IBC must stay on, the Defaulters paradise is lost

By Resolution Team (resolution@vinodkothari.com)

The following is our quick summary of the ruling of the Apex Court. We may be coming up with detailed write-ups later. Read more

Debut of Section 130 of the Companies Act, 2013

-NCLT orders recasting of financial statements of ILFS

By Smriti Wadehra (smriti@vinodkothari.com)

Introduction

As the first instance of regulatory recasting of financial statements, the National Company Law Tribunal, Mumbai has directed the reopening of the books of accounts of IL&FS Group (‘Company’) and some of its subsidiaries. The rationale behind such direction is that the Tribunal considers that the accounts of the Company and its specific subsidiaries are fraudulently prepared in the last five years and are not reliable.

The ruling[1] may be a trailblazer as there may be several instances in future of either voluntary recasting or regulatory recasting of financial statement. This article is a general discussion of the law and the global practice in this regard.

Read more

Ineligibility criteria u/s 29A of IBC: A net too wide!

-By Richa Saraf & Sikha Bansal (resolution@vinodkothari.com)

 

Resolution plan is designated to be the “way-out” for insolvent entities coming under the Insolvency and Bankruptcy Code, 2016. 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. The Code had not gone into the basis and criteria for selection of the resolution applicant. 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 the illicit ways, several amendments were made in the Code, first by way of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017[1] dated 23rd November, 2017, then by Insolvency and Bankruptcy Code (Amendment) Act, 2018[2] 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, and has ten parts (i.e. clauses), the tenth part is further divided into three sub-parts, of which the third part has its own descendants. These layers of section 29A are more in the nature of elimination rounds. The write-up below digs deeper into the section.

Resolution Applicant – Who and Who Not?

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).

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.

Section 29A – A Pandora Box

According to 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 –

  • (i) the person is an undischarged insolvent;
  • (ii) the person is a wilful defaulter in terms of the RBI Guidelines issued under the Banking Regulation Act, 1949;
  • (iii) 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;
  • (iv) the person has been convicted for any offence punishable with imprisonment for 2 (Two) years or more;
  • (v) the person is disqualified to act as a director under the Companies Act, 2013;
  • (vi) the person is prohibited by SEBI from trading in securities or accessing the securities markets;
  • (vii) 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;
  • (viii) a person who has executed an enforceable guarantee in favour 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;
  • (ix) a person who has been subject to the above listed disabilities under any law in a jurisdiction outside India;
  • (x) 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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and alternative investment funds registered with SEBI.

Major aspects of the provision have been analysed as below-

Layers of Ineligibility

An assiduous analysis of Section 29A reveals that the section imposes four layers of ineligibility, as mentioned below-

  • First layer ineligibility, where the person itself is ineligible;
  • Second layer ineligibility, i.e. where a “connected person” is ineligible;
  • Third layer ineligibility, i.e. being a “related party” of connected persons; and
  • Fourth layer ineligibility, where a person acting jointly/in concert with a person suffering from first layer/second layer/third layer ineligibility, becomes ineligible.

 

 

Clause (c): The NPA Criterion

Clause (c) of Section 29A debars a person or a person acting jointly or in concert with such person who-

  • has an account classified as NPA;
  • is a promoter of a corporate debtor the account of which has been classified as NPA;
  • is in the management of a corporate debtor the account of which has been classified as NPA;
  • is in control of a corporate debtor the account of which has been classified as NPA.

At least a period of 1 (One) year should have elapsed from the date of classification till the insolvency commencement date. Therefore, any company (including the promoters/persons in the management of or control of such company) which has its account classified as NPA for last 1 (One) year will not be able to file a resolution plan however, the Code provides for a carve out that such person shall be eligible to submit the 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. See also, clause (j) of Section 29A.

Clause (g): Vulnerable Transactions

According to clause (g) of Section 29A, a promoter/person in the management of or control of a corporate debtor in which a preferential transaction (Section 43), undervalued transaction (Section 45), extortionate credit transaction (Section 50), or fraudulent transaction (Section 49) have taken place and the adjudicating authority has passed an order under the Code. The provision is qualified to the extent it uses the term “corporate debtor”, and that the adjudicating authority should have passed an order under the Code itself.

Clause (h): Guarantor executing guarantee in favour of the applicant creditor

The negative list includes persons who might have guaranteed the obligations of the corporate debtor which is currently in insolvency. As the provision goes, a person who has executed enforceable guarantee in favour 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. Going by the construction of the clause, it appears that the guarantee should be in favour of that creditor who has applied for insolvency resolution of the corporate debtor.

The provision came up for discussion in RBL Bank Ltd. v. MBL Infrastructures Ltd. [CA(IB) No. 543/KB/2017; order dated 18.12.2017], where NCLT took a view that there was no intent of the Government to debar all the promoters, only for the reason for issuing a guarantee which is enforceable, unless such guarantee has been invoked and not paid for, or the guarantor suffers from any other antecedent listed in section 29A. The resolution applicants stated that by purporting to disqualify the entire class of guarantors under the said clause would be violative of the valuable rights of the applicant. If the guarantee is not invoked and demand is not made on the guarantor, the debt payable by him is not crystallized and the guarantor cannot be therefore said to be in default for breach of the guarantee and be penalized merely because a legal and binding contract of guarantee exists, which is otherwise impossible but is subject to its invocation in accordance with the terms of the guarantee. The NCLT agreed to the view observing that the guarantors in respect of whom, a creditor has not invoked the guarantee or made a demand under guarantee should not be prohibited. Therefore, no default in the payment of dues by the guarantor has occurred, cannot be covered under clause (h) of Section 29(A). It cannot be the intent of clause (h) to penalize those guarantors who have not been offered an opportunity to pay by calling upon them to pay the dues, by invoking the guarantee. Therefore, the words “enforceable guarantee” appearing in clause (h) are not to be understood by their ordinary meaning or in the context of enforceability of the guarantee as a legal and binding contract, but in the context of the objectives of the Code and Ordinance in general and clause (h) in particular.

Clause (j): Connected persons

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 –

Explanation.— For the purposes of this clause, the expression “connected person” means-

(i) any person who is the promoter or in the management or control of the resolution applicant; or

(ii) 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

(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):

The definition can be analysed as follows-

  1. Clause (i) includes:
    1. promoter;
    2. person in the management; and
    3. person in control

of an ineligible resolution applicant.

Further, in accordance with clause (iii),

  • where (a) or (b) or (c) is a company, the holding, the subsidiary, and the associate companies or “related party” of (a), (b), (c) (as the case may be), shall also be disqualified.
  • where (a) or (b) or (c) is a natural person, any “related party” of such person shall also be disqualified.

 

  1. 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.

For example, A wants to submit resolution plan for B Ltd. A proposes that C shall be in the management of B Ltd. during the implementation of the resolution plan. However, C is a person suffering disability under Section 29A. A, therefore becomes ineligible to submit resolution plan.

Further, in accordance with clause (iii),

  • where (a) or (b) or (c) is a company, the holding, the subsidiary, and the associate companies or “related party” of (a), (b), (c) (as the case may be), shall also be disqualified.
  • where (a) or (b) or (c) is a natural person, any “related party” of such person shall also be disqualified.

For scope of the term “related party”, see below.

Note that from the scope of “holding company, subsidiary company, and associate company”, the following have been excluded, i.e. the following can proceed to submit the resolution plan-

  • a scheduled bank; or
  • an ARC registered with RBI under section 3 of the SARFAESI Act, 2002; or
  • an AIF registered with SEBI.

Related party

“Related party” has been defined in Section 5 (24); however, the definition is specific to corporate debtor, i.e. the definition specifies the persons who shall be treated as “related party’ of the corporate debtor. Hence, where the persons referred to in clauses (i) and (ii) of the Explanation are persons other than the corporate debtor, the definition under section 5(24) becomes irrelevant, and the following may be noted-

  • Where one of the person is a company, “related party” shall be interpreted in terms of section 2(76) of the Companies Act, 2013;
  • Where none of the persons is a company, the definition of the term “related party” has been left open. In the context of natural persons, generally the term “relative” is used.

Associate Company

For the purpose of determining whether a company is an associate of the other, the definition as under Section 2(6) of the Companies Act, 2013 shall be referred, wherein “Associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

For the purpose of the said definition, “significant influence” means control of at least 20% (twenty per cent) of total share capital, or of business decisions under an agreement.

For example- “Company X” holds 20% of total share capital of Company “Y”, then Company X will be deemed to be an associate company of Company Y.

Relevant time- whether lookback allowed?

A relevant question would be regarding the point of time at which the ineligibility has to be ascertained. The language of the section suggests that only present status of the resolution applicant has to be seen. No lookback period has been prescribed. However, the authors opine that it would be upon the committee of creditors to decide on whether any past event shall be weighed upon while making the final decision.

More of a Diktat?

The Code has been designed to find the best possible way out for an ailing entity- it was meant to be more inclusive in approach. However, the reach of Section 29A extends to four layers (as explained above), and may lead to exactly opposite results. The intent of the Code was not to restrict genuine applicants, but only to exclude participation from habitual miscreants or applicants who might themselves be sick, however, Section 29A may result in elimination of persons who might be interested in buying stakes in the entity.

See RBL Bank Ltd. v. MBL Infrastructures Ltd. [CA(IB) No. 543/KB/2017; order dated 18.12.2017], where the NCLT, considering the objective of the Ordinance, 2017, opined that clause (h) of section 29A is not to disqualify the promoters as a class for submitting a resolution plan. The intent is to exclude such class of persons from offering a resolution plan, who on account of their antecedents, may adversely impact the credibility of the processes under the Code. The case is, for the time being, pending with NCLAT[3].

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 reach of Section 29A extends to four layers (as explained above), and may lead to exactly opposite results. It is quintessential to ensure that the citadel of insolvency resolution does not have holes into it but at the same time, it is also important to ensure that the citadel is not inaccessible, with no steps, doors or windows.

The intent of Section 29A will be counter- productive if it results into a whole lot of intending resolution applicants being disentitled, because the recursive definitions of related party, connected persons etc are cast wide enough, intertwining all the entities promoted by an entity.


[1] http://ibbi.gov.in/webadmin/pdf/legalframwork/2017/Nov/180404_2017-11-24%2007:16:09.pdf

[2] http://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Jan/182066_2018-01-20%2023:35:29.pdf

[3] Last update as on 10.02.2018.

Inapplicability of Limitation Act to Insolvency and Bankruptcy Code?

By Richa Saraf , (legal@vinodkothari.com)

 

In a recent National Company Law Appellate Tribunal (NCLAT) ruling of Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd.[1] (11.08.2017), several issues with regard to the Insolvency and Bankruptcy Code, 2016[2] (IBC) were discussed. One of the issues for consideration before the NCLAT was whether the application under Section 7 of the IBC is time barred, as the debt claim related to the years 2011, 2012 and 2013 and it was held that the Limitation Act, 1963[3] (Limitation Act) does not apply to IBC. Below we discuss the ruling along with its analysis: Read more

No separate Application is required where 100% Subsidiary seeks Amalgamation with its Holding Company: NCLT Bengaluru Bench

In the recent ruling of National Company Law Tribunal[1]Bengaluru Bench (‘the Hon’ble NCLT’), the Bench has held that no separate application is required to be filed by the transferee company in case of merger of a wholly owned subsidiary company with its parent company by virtue of scheme of amalgamation.

Below we discuss the same in details along with analysis of the impact of the ruling. Read more