NCLT Kolkata Rules on Non-Defaulting Promoters

[Saurav Roy is a 4th-year student and Lisa Mishra a 3rd-year student at ILS Law College, Pune]

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (“the Ordinance”) was enacted to, among other things, override the actions of unscrupulous promoters who seek to buy back company assets at a throw-away price, as compared to what is actually owed to the lenders. However, the Ordinance did not clarify the role, rights and position of “non-defaulting” promoters who endeavour to save their companies, in particular because section 29A of the Insolvency and Bankruptcy Code (“I&B Code”) only restricts “wilful defaulters” from participating in asset-bids.

NCLT Clarifies

The insolvency process surrounding MBL Infrastructure (“MBL Infra”) has been closely followed ever since its corporate insolvency resolution process (“CIRP”) began in April 2017. The Kolkata bench of the National Company Law Tribunal (“NCLT”) has recently ruled that promoters of MBL Infra will be allowed to bid on the company’s assets. This order has helped clarify the stance on non-defaulting promoters and their position under section 29A of the I&B Code, as it has been elucidated that all promoters will not be barred from bidding on the company, and that non-defaulting promoters will be allowed to ensure the smooth continuance of the CIRP by being permitted to bid on their own company’s assets.

The Order

MBL Infra had filed an application with the NCLT seeking clarification on whether its promoters were still legally allowed to bid on its assets. It is noteworthy that prior to the promulgation of the Ordinance, the committee of creditors had given a near go-ahead to the promoter’s plan to save the company but, after the Ordinance, the committee expressed its wariness and doubt over the course of multiple meetings. Subsequently, the committee disallowed the promoter from participating in the CIRP and called for fresh resolution plans for the company.

While adjudicating upon the dispute, the NCLT relied on the intent and purpose of the Ordinance and held that the statement of objects of the Ordinance provides that it has been promulgated to “prohibit certain persons from submitting a Resolution Plan, who, on account of their antecedents, may adversely affect the credibility of the processes under the Code.” The Court went on to opine that this statement clearly does not seek to disqualify promoters as a class of people who can submit resolution plans for the revival of the company, and that it is only natural to expect promoters of a company to submit resolution plans, unless it has an active role to play in terms of fraud, indulgence, malfeasance, or any other criminal activity which causes financial losses to creditors and other adverse effects on the company’s financial strength.

The NCLT’s intention to include promoters in the CIRP can be gleaned from its order, which states that “…merely because there is a default by a borrower in repayment of borrowed amount to a creditor does not render the borrower or its guarantor, dishonest. Every act of default cannot be equated with malfeasance…” Moreover, the ruling clarified that the promoter could not be held liable as a defaulter under section 29A of the I&B Code as there existed no invoked guarantee and no demand against him.

Additionally, the Kolkata Bench of the NCLT reinforced basic constitutional principles by iterating that “…disqualifying the entire class of guarantors would be discriminatory and is violative of Article 14 of the Constitution of India and cannot be stated to have a logical nexus with the objective sought to be achieved by the ordinance…”.  

Conclusion

The NCLT’s clarification of the legal position will be beneficial to companies which can be financially resuscitated by bona fide promoters infusing the required finances. The NCLT’s ruling in this case serves as a facilitator for insolvency processes nationwide and will be advantageous in the long run. It also helps assuage some of the furore that was created in the wake of promulgation of the Ordinance.

– Saurav Roy & Lisa Mishra

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