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NCLAT allows promoters under liquidation settle with creditors

New Delhi, April 16 (IANS) Opening up a new window for promoters looking to retain control of their companies facing bankruptcy proceedings, the National Company Law Appellate Tribunal (NCLAT) has held that shareholders and owners can reach a settlement with creditors when their entity is under liquidation and an official liquidator has been appointed by the insolvency court.

The NCLAT order has far reaching consequences over resolution of stressed assets, especially those where promoters are seeking settlement post-initiation of bankruptcy proceedings in the National Company Law Tribunal (NCLT).

As per amendments made to the Insolvency and Bankruptcy Code (IBC), promoters are barred from participation in the resolution process of their stressed assets If at the liquidation stage, they are now permitted to file an application for approval of settlement with creditors, several promoters could jump at the opportunity as it would allow them to retain control of their respective companies while cleaning up the debt.

The path breaking NCLAT order came on an appeal filed against the decision of the NCLT Mumbai bench. This bench had held that the application filed under Section 391 of the Companies Act 1956 (corresponding to Section 230(1), Companies Act 2013) could not have been moved by the shareholders after the appointment of Official Liquidator.

The NCLT reasoned that only the Official Liquidator was entitled to represent the company under liquidation and formulate or approve any scheme of settlement.

Section 391 of Companies Act, 1956, deals with the “Power to compromise or make arrangements with creditors and members”. This is similar to provisions in section 230 of Companies Act, 2013.

The NCLAT, however, held this view of the NCLT to be erroneous after referring to judgements of the Supreme Court and several High Courts.

The Appellate Tribunal held : “Liquidator is only an additional person and not exclusive person who can move application under Section 391 of the old Act when the company is in liquidation. Looking to these Judgements, we are unable to support the view taken by NCLT that the Appellant could not have filed the Petition under Section 391 of the old Act”.

In this matter, the promoter-director of Amar Dye Chem Ltd had filed a scheme of compromise in winding up proceedings before the Bombay High Court earlier where Liquidator had already been appointed. The matter was transferred to the NCLT Mumbai bench on the basis of a notification dated December 7, 2016.

“We will have to see whether the NCLAT ruling in the Amar Dye Chem case sets a precedent as in this case the winding up process was already up for approval in High Court. NCLAT has also said that settlement application given by promoters will be decided by the High Court and would be accepted by NCLT,” said a legal expert not willing to be named.

While NCLAT has said that it had no doubts over the applicability of a scheme of compromise and arrangement even when the liquidation process is on, NCLT could accept or reject the offer of settlement under the provisions of Companies Act.

Legal experts, however, say this could open the way for a fresh resolution even when a company is being liquidated, by giving the opportunity to the promoters to come up with a viable plan.




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