Lenders turn to MCA to make in­sol­vency code tougher

Mint Asia ST - - Inside - BY S HAKTI PAT RA

At

least three large lenders in­clud­ing ICICI Bank Ltd, State Bank of India (SBI) and Bank of Bar­oda (BOB) are plan­ning to ask the min­istry of cor­po­rate af­fairs (MCA) to fur­ther clip the wings of pro­mot­ers of com­pa­nies fac­ing in­sol­vency pro­ceed­ings.

The lenders will try to con­vince the min­istry to amend the In­sol­vency and Bank­ruptcy Code (IBC) to re­move cer­tain in­con­sis­ten­cies so that pro­mot­ers of such de­fault­ing com­pa­nies can be com­pletely kept out of the res­o­lu­tion process, two peo­ple aware of the mat­ter said, re­quest­ing anonymity.

They pointed out that while sec­tion 30 (2) (e) of 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 DIF­FER­ING OUT­COMES While 43% of the cases filed by fi­nan­cial cred­i­tors un­der IBC dur­ing the sam­ple pe­riod were dis­missed, the per­cent­age of dis­missal for op­er­a­tional cred­i­tors was slightly higher at 58% the IRP need to seek their ap­proval as sec­tion 30 (2) (e) seems to sug­gest? And won’t seek­ing share­hold­ers’ ap­proval bring in the pro­mot­ers au­to­mat­i­cally into the process,” asked one of the peo­ple cited ear­lier.

Ac­cord­ing to the IBC, the board of a com­pany is sus­pended upon ad­mis­sion and the IRP is re­spon­si­ble for the day-to-day man­age­ment of the com­pany.

Emails sent to ICICI Bank, SBI and BOB re­mained unan­swered till the time of go­ing to press.

Lawyers deal­ing with bank­ruptcy cases are scep­ti­cal 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 sub- stan­tial as­sets and sim­i­lar other mat­ters un­der com­pany law,” said Dar­shan Upad­hyay, a part­ner at law firm Eco­nomic Laws Prac­tice.

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, added Upad­hyay.

Another se­nior lawyer, who didn’t want to be iden­ti­fied, is of the opin­ion that any res­o­lu­tion plan in­volv­ing some of the large com­pa­nies won’t end at the Na­tional Com­pany Law Tri­bunal (NCLT), but will ul­ti­mately end up at the Supreme Court.

“Banks can’t be given an ab­so­lute free run which seems to be the case now. Res­o­lu­tion plans will be chal­lenged and ul­ti­mately, the SC will have to come in and lay down the ground rules,” he said.

The Supreme Court has al­ready been called to rule on IBC. On 1 Septem­ber, the apex court ruled in favour of ICICI Bank af­ter In­noven­tive In­dus­tries ap­pealed an NCLT (and later, the ap­pel­late tri­bunal) ver­dict. The Supreme Court said that the man­age­ment can­not con­tinue if dues are not paid and a cen­tral law should pre­vail over state law when­ever the two are con­tra­dic­tory.

The Supreme Court rul­ing comes at a time when 11 out of the 12 com­pa­nies short­listed by the Re­serve Bank of India for early res­o­lu­tion un­der the IBC are un­der the con­trol of in­terim res­o­lu­tion pro­fes­sion­als. Two weeks ago, the cen­tral bank asked lenders to move against an ad­di­tional 28 large de­fault­ers.

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