From the Viewsroom

Resolution or liquidation?

A Srinivas | Updated on March 21, 2021

SC ruling on IBC vis-a-vis Companies Act leaves out nuances

Recently, the Supreme Court ruled out any attempt by existing promoters to rebid for their companies in the liquidation process. The apex court observed that Section 29 (a) of the Insolvency and Bankruptcy Code, which effectively disqualifies an existing promoter to rebid for units on the block, will prevail over Section 230 of the Companies Act, which allows the creditors and existing promoters a fighting chance to cobble together a restructuring scheme. There can be no denying that IBC has been a saviour for creditors with its 270-day time limit (at least on paper). But the nagging doubt in the minds of ‘resolution professionals’ is whether companies are being turned in for liquidation before their chances of revival have been wholly exhausted.

This assumes importance in an economy, flagging even before Covid, that is struggling to get back on its feet with livelihoods on the brink. To be sure, the Reserve Bank in June 2019 relaxed the provisions of its ‘February 12, 2018 circular’ which had sought to declare as insolvent any company which failed to resolve its bad loans within six months. This has now been replaced by a review process of a month after a payment default, followed by another 180 days to set the concern back on track. After Covid, another restructuring offer and a moratorium on IBC was announced. With the IBC under suspension till March 24, Section 230 may well have assumed relevance.

The question in these troubled times is whether banks need more than 180 days under the June 2019 circular (or options under Section 230) to hammer out a resolution. With Section 230 no longer being within the ambit of the NCLT’s processes, banks should diligently exercise all options before dispatching a concern to NCLT. The SC has sought to clarify the role of the NCLT by keeping out Section 230. Banks must bring to bear their resolution skills at a time when genuine investors may become hard to find.

Published on March 21, 2021

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