Liquidation Under IBC: Promoter Re-Entry Legitimised?

The bankruptcy regulator has made way for schemes of arrangement once an insolvent company reaches the liquidation stage. The amended regulations may allow promoters—otherwise barred from proposing resolution plans—to propose schemes once the company is in liquidation, experts told BloombergQuint.

The issue first came to the fore in the case of Gemini Communication Ltd., where the National Company Law Appellate Tribunal held that a scheme of compromise must be considered first at the liquidation stage before the assets of the company can be liquidated. But the NCLAT didn't go into the question of whether such schemes can be proposed by the erstwhile promoters who are ineligible under Section 29A of the Insolvency and Bankruptcy Code.

Section 29A lays down the ineligibility criteria applicable to resolution applicants during the insolvency process. Further, the IBC bars the liquidator from selling any movable or immovable assets of the corporate debtor to any entity who is ineligible to propose a resolution plan.

The NCLAT's decision prompted the Bankruptcy Law Reform Committee to deliberate on this issue. The committee was of the view that IBC does not prohibit ineligible persons to participate in compromise or arrangement proposed under Section 230 of the Companies Act. This section allows for a scheme of arrangement and compromise between shareholders and/or creditors of a company in liquidation.

Last week, the Insolvency and Bankruptcy Board of India notified amendments to its liquidation regulations, allowing for a compromise or arrangement under Section 230 of the Companies Act, 2013. The process for such a compromise needs to be completed within 90 days from the liquidation commencement date. The amended provision doesn't specify who can or cannot propose a scheme.

Once a liquidation order is passed against an insolvent company, promoters are now entitled to propose a resolution plan via a scheme of arrangement, AS Chandhiok, senior advocate practicing at the Supreme Court, told BloombergQuint. An asset sale to ineligible promoters—that's barred under the IBC—is different from a scheme of arrangement, he said.

The scheme will have to be approved as per the process laid down under Section 230, he said.

• An application proposing the scheme would need to be made to the NCLT that will order a meeting of the creditors or class of creditors, or of the members or class of members.
• A scheme proposing debt restructuring will need to approved by at least 75 percent secured creditors in value.
• Only those persons with at least 10 percent shareholding or having an outstanding debt of at least 5 percent of the overall debt, can raise an objection to a scheme of arrangement.
• The final approval for a scheme lies with the NCLT.

IBC is premised on the basis of shareholders' disenfranchisement after a default and promoters of a company in default should not be handed back management with the creditors taking a write-off, L Viswanathan, partner at law firm Cyril Amarchand Mangaldas, had told BloombergQuint when the Bankruptcy Law Reform Committee had made its recommendations. While the purpose of a Section 230 scheme in liquidation is to give resolution a further chance, consistent with the object of IBC, it should be not at the cost of other policy considerations such as Section 29A that apply in IBC, he had said.

Offering a contrary view, Senior Advocate Ramji Srinivasan had said that if no one else has shown interest in the insolvent company and every stakeholder is running at a loss, there is no point in arguing that the promoters should still be debarred. He, however, had suggested that there should be qualifications to promoters applying under Section 230. If there has been a serious criminal infraction on account of promoters, for instance if the promoters are guilty of fraud or are ineligible to be directors, they should be barred from proposing scheme of compromise under Section 230 as well, he had said.

No such caveat has been specified by the IBBI in its amended regulations.