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The Supreme Court’s ruling to bar defaulting promoters from hanging on by hook or by crook reaffirms the spirit of the Insolvency and Bankruptcy Code (IBC). The law is meant to ensure quick creditor seizure of defaulting companies followed by a resolution, or a conclusive auction of assets. The verdict has held that a person ineligible under IBC to submit a resolution plan can’t take recourse to the companies law to file a plan.
This is logical. If he were to do so when the company is undergoing liquidation under IBC, it would mean circumventing the code’s restrictions. By upholding the constitutional validity of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, the court authenticates the supremacy of the bankruptcy law. Market players often complain that many companies suffer, as their promoters divert money out of the company in questionable ways or choose not to find ways to repay their dues. IBC forbids promoters of defaulting companies from taking part in any stage of the resolution process, bidding included.
However, keeping defaulting promoters out limits the bidders, and depresses the successful bid below its potential high. ‘It would lead to manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a compromise or arrangement under Section 230 [of the Companies Act],’ held the bench. Courts must also be guided by the goal of maximising returns from the resolution process. By rejecting backdoor entry, the court underlines that defaulting promoters stand to lose their companies.
This piece appeared as an editorial opinion in the print edition of The Economic Times.