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Banks turn to ministry of corporate affairs to make Insolvency and Bankruptcy Code tougher

LiveMint logoLiveMint 10-09-2017 Shakti Patra

Mumbai: 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.

Graphic: Mint

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 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 substantial 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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