GAMING THE SYSTEM

PROMOTERS WHO DEFAULT ARE TAKING ADVANTAGE OF NEW IBC PROVISIONS AND MISUSING THEM TO ESCAPE ACTION UNDER OLDER LAWS.

Promoters who default are taking advantage of new IBC provisions and misusing them to escape action under older laws

Unscrupulous promoters are trying to manipulate the Insolvency and Bankruptcy Code (IBC). And the provision they seem to be ‘misusing’ most is the one that allows corporate defaulters to start bankruptcy proceedings against themselves. As of now, the IBC provides a stay on the continuation of proceedings or suits, against a corporate debtor and its assets if insolvency proceedings are pending.

There are many such cases – out of 540 insolvency proceedings approved by the National Company Law Tribunal (NCLT) till December 2017, 108 were initiated by the corporate defaulters themselves. Many of these were initiated either to avoid recovery proceedings under earlier acts such as the SARFAESI Act and the RDDB Act or to safeguard promoters’ personal assets. But the regulator and adjudicating authorities are taking note of the misuse.

Recently, the NCLT rejected an application by Gemini Innovations, which had defaulted on a loan of `30 crore given by SBI. It had apparently started insolvency proceedings to avoid recovery under a couple of earlier acts.

Even the Insolvency Law Committee, which was formed to amend the law, has indicated possible misuse of the provision by promoters to prevent their personal assets being attached by creditors under the IBC. Consequently, it has recommended that the law should clearly state that such protection is restricted to only corporate assets. The committee has also recommended the need for a special resolution to be passed by shareholders of the defaulting company if the latter wants to prove bankruptcy. With the law now barring promoters from buying back their companies under the insolvency process, it will be suicidal for defaulters to take the insolvency route.