IBC: Judicial Member Takes On Modi Government’s Insolvency Ordinance

MK Shrawat, a judicial member of the National Company Law Tribunal, Mumbai bench has permitted a promoter of an insolvent company to do what the amended Insolvency and Bankruptcy Code, 2016 explicitly disallows.

Were his ruling to apply widely, the Ruias could bid for Essar Steel Ltd., Singhals for Bhushan Power and Steel Ltd., and Manoj Gaur would be eligible to submit a resolution plan for his family-owned Jaypee Infratech Ltd..

Section 29A of the IBC specifically bars such promoters from bidding for their companies. The section was notified via an ordinance in November last year and lays down disqualification criteria for resolution applicants. One of the criteria states that promoters of insolvent companies are ineligible to submit a resolution plan.

The ordinance explicitly states that the ineligibility criteria also applied to resolution plans submitted before its promulgation. However, Shrawat, the lone NCLT member hearing the Wig Associates' case, has disagreed with the retrospective provision.

He has ruled that since the company was admitted for insolvency before the ordinance barred promoters, their right to submit a resolution plan cannot be denied.

“...one must not be allowed to change rules of the game in mid so as to get a desired result. Players/stakeholders must be aware of the rules at the commencement of the game/proceedings.”

The Wig Back Story

Wig Associates was admitted for insolvency in August 2017 basis a petition it filed the previous month. Promoter of the company, Mahendra Wig had submitted a one-time settlement plan to Bank of Baroda, the sole lender to the company. The bank had agreed to consider the plan and asked the resolution professional to consider this as a bid under the insolvency process. By April 2018, Mahendra Wig was the sole resolution applicant and the creditors' committee approved the plan submitted by him. But, a question was raised on the eligibility of the promoter of a defaulting company to submit a resolution plan.

The NCLT ruled the resolution plan as eligible on grounds that

- any amendment to a statute, affecting the legal rights of an individual, must be presumed to be prospective unless it is made expressly or is implied retrospective.

- that insolvency resolution proceedings are continuous proceedings, and therefore cannot be halted, altered or changed once commenced till finalisation.

- once the insolvency resolution process has commenced (resolution professional has invited expression of interest) it should be governed by provisions existing on the date when the petition was admitted.

Counter Point

I have no quarrel with the legal proposition that an amendment cannot take away a vested right, but the question is if this principle of law is applicable in this case, Vikram Nankani, senior advocate practising at the Bombay High Court told BloombergQuint.

Such promoters didn't have a vested right in that sense; all they had was an opportunity to participate in the revival of the company and this opportunity was not exclusive to them since a resolution plan could be submitted by anyone, Nankani pointed out.

There are two more arguments in favour of Section 29A that the NCLT has not considered, Nankani pointed out.

One, Section 30(4) of the IBC which explicitly states that a committee of creditors shall not approve resolution plans, submitted before the ordinance was passed, by applicants that don't meet Section 29A criteria.

Section 30(4) is a clear pointer that there is a bar on lenders considering such an application which is pending when the ordinance came into effect and this militates the principle of vested right, Nankani said.

Second, Section 29A gives promoters an opportunity to become eligible as resolution applicants by clearing overdue amounts with interest before submitting a plan.

Unless the order is altered by a judicial process, I am sure promoters will use and take advantage of it, Nankani added. But the fact that it's an order of a single-judge bench will also get stressed.

For the full interview, watch the video below: