The ordinance amending India's Insolvency and Bankruptcy Code, which barred a majority of defaulting promoters from bidding for their assets, is now facing its first legal hurdle.
Punjab-based RMS Pvt. Ltd. has challenged the ordinance in the Punjab and Haryana High Court, a lawyer familiar with the matter told BloombergQuint on the condition of anonymity. Law firm Chandhiok & Associates is representing the petitioner.
RMS had defaulted on approximately Rs 100 crore worth of loans. The promoter had submitted a resolution plan for repaying its lenders just before the IBC ordinance. With this amendment, the promoter stood ineligible to participate in the resolution process.
RMS has challenged the ordinance on two key grounds, the lawyer quoted above said.
1. Retro-activity of the ordinance.
2. It does not distinguish between a genuine promoter and a wilful defaulter.
The high court granted interim relief to the company while allowing the resolution professional to continue to oversee it management, the lawyer said. The matter has been posted for hearing on Jan. 25. Pending the court's order, RMS would have gone into liquidation on Dec. 11.
“The overarching manner in which the ordinance is drafted would have the effect of ousting almost all promoters from the resolution process,” Pooja Mahajan, managing partner at Chandhiok & Associates and lawyer for RMS told BloombergQunt.
This could not have been the intent of the law – the BLRC report specifically talks about giving genuine promoters a second chance. In certain cases, especially for SMEs, the promoters will be the only persons submitting the plan. It would be very unfair to force a company into liquidation even if the promoter is genuine and has the ability to revive the company.Pooja Mahajan, Managing Partner, Chandhiok & Associates
The IBC ordinance, passed in late November, had made at least nine categories of persons ineligible for submitting a resolution plan for the indebted companies facing insolvency action at the National Company Law Tribunal.
Amendments to the code said that promoters whose accounts have been non-performing for a year will not be allowed to participate in the resolution plan. Those who have not have settled overdue amounts on said accounts will also not be permitted to bid for their assets.
Also Read: Everything You Need To Know About The Insolvency And Bankruptcy Code Amendments
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