Banks knock MCA’s doors for IBC
At least three large lenders including ICICI Bank, State Bank of India (SBI) and Bank of Baroda (BoB) are planning to move the Ministry of Corporate Affairs (MCA) seeking to further reduce the power of promoters of companies undergoing insolvency proceedings.
The lenders will try to convince the MCA to make certain amendments to the Insolvency and Bankruptcy Code (IBC) and remove certain inconsistencies without which the promoters of such companies can’t be completely kept out of any meaningful resolution, said two people aware of the matter.
They pointed out that while section 30 (2) (e) of the IBC states that the resolution plan should not “contravene any of the provisions of the law for the time being in force”, section 238 of the Act completely negates this and states that the “provisions of this code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”.
“Let’s say a certain resolution plan includes raising some equity capital and/or make some asset sales that require shareholders’ approval under the Companies Act. Can the interim resolution professional (IRP) do so without the approval of shareholders as section 238 of IBC seems to suggest or does the IRP need to seek their approval as section 30 (2) (e) needs to suggest? And won’t seeking shareholders’ approval bring in the promoters automatically in to the process?” asked one of the people cited earlier.
According to the IBC, upon admission, the board of a company is suspended and the IRP is responsible for daily management of the company.
Emails sent to ICICI Bank, SBI and BoB remained unanswered till going to print.
Lawyers dealing with bankruptcy cases who Mint spoke to are skeptical about whether creditors can be empowered beyond a certain point.
“While the basic idea behind bringing in the IBC was to empower financial creditors to approve a resolution plan, can that be done at the cost of law of natural justice when it comes to implementation of such resolution? No doubt, when a company is liquidated, creditors have first right over its assets and not shareholders. But we are not dealing with liquidations here in all cases. We are looking at a resolution of the debt and turning around the company in the interest of all stakeholders. So, I don’t think shareholders right to vote can be taken away when resolution requires for instance issue of shares on a preferential basis, sale of substantial assets and similar other matters under company law,” Darshan Upadhyay, partner at law firm Economic Laws Practice, said.
Under IBC, if a resolution is not arrived at within 270 days after a case is admitted, the process moves to liquidation.
Not taking away such rights from shareholders, however, may dilute the intent of the IBC and provide a backdoor entry to the controlling shareholders, resulting in difficulties whilst implementing the approved resolution plan, Upadhyay added.