Hon’ble NCLAT opens a backdoor entry route for defaulting promoters:

Facts:

The National Company Law Tribunal, an adjudicating authority under the Insolvency and Bankruptcy Code (IBC), had earlier on May 8, 2019 ordered liquidation of the company after it raised concerns over the manner in which one of the financial creditors, Andhra Bank, had approached it for one-time settlement and withdrawal of the IBC proceedings against the company, whose promoters are absconding from the country.

The promoters of the group - Nitin Sandesara, Chairman and Managing Director and Chetan Sandesara, Joint Managing Director - are being investigated by various law enforcement agencies such as the Enforcement Directorate and CBI. The promoters of the group have been accused of money laundering and bank frauds involving Rs 8,100 crore approx.

The NCLAT had earlier stayed the NCLT order for liquidation of the company. Sterling Biotech owed over Rs 9,000 crore approx. to various creditors. Hon’ble NCLT in its liquidation order had raised concerns over how financial creditors agreed for a one-time settlement without verifying the source of fund from which the promoters promised to pay them. It had also said that if the one-time settlement proposal is accepted, the promoters would get the company back by paying Rs 3,110 out of around Rs 9,000 crore dues, a hair cut of 64 per cent

Existing provision under IBC:

The Insolvency and Bankruptcy Code (IBC), despite several pinches to the law over the last three years that it has been in operation, continues to generate undesirable surprises, thanks to new ways of interpreting legislative intent while interpreting the Code.

When the government found that defaulting promoters can re-enter the same company they ran into the ground by bidding at the bankruptcy courts, it inserted clause 29A to prevent just this.

This clause disallows promoters from bidding for a company at the National Company Law Tribunal (NCLT) unless they have cleared their dues in full.

NCLAT conclusion:

Last month the National Company Law Appellate Tribunal (NCLAT) showed promoters a new way of getting back their companies by holding that the insolvency law only disallows them from bidding for their own company without clearing dues.

It does not stop them from offering one-time settlements to banks and taking the company out of the insolvency process altogether. This is how Sterling Biotech was ordered to be given back to its promoters, the Sandesaras, with the proviso that they should clear all their dues.

When the matter ended at the appellate tribunal (NCLAT), the order went in favour of the promoters, thus allowing them to neatly regain control of a company in which they were not allowed back under section 29A.

Key takeaway:

It is possible to argue that the NCLAT has not done anything more than ensuring that the creditors got what they were willing to settle for, but in the process, they have opened up one more boulevard for promoters to use backdoor methods to burrow their way back into the company they ran aground.

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