In a step that could give debtors significantly more elbow room to settle, the National Company Law Appellate Tribunal (NCLAT) has held that a company can exit the insolvency process even if an interim resolution professional has been appointed & a moratorium has been imposed by the National Company Law Tribunal (NCLT) under Insolvency & Bankruptcy Code (IBC).
This provides a new window of opportunity for companies to come out of the corporate insolvency resolution process (CIRP) midway through the formalities & settle with lenders.
Although proceedings under IBC currently stand suspended for a year starting March 25 to protect companies which could default on their debt due to the Coronavirus pandemic, the NCLAT’s ruling could provide an opportunity to firms already in the resolution process, especially debtors with relatively smaller debts.
In the past, companies that tried to settle their debts with banks have been turned down either by the NCLT or the creditors as interim resolution professionals had already been appointed or an order of moratorium had been passed by the adjudicating authority.
This lack of flexibility has been cited as one reason why the average time taken for completion of resolution proceedings under IBC is 375 days, at least 45 more than the prescribed maximum limit of 330.
In its judgment, a 3-member bench, headed by acting chairperson Justice Bansi Lal Bhat, held that since the corporate debtor & operational creditor, which had taken the company to NCLT, had “amicably settled”, the CIRP process was no longer relevant, & thus stopped.
“The respondent company is released from all the rigour of law & is allowed to function independently through its board of directors with immediate effect,” the 3-member bench held in its judgment delivered on July 14 & uploaded later this week.
The judgment came in the case of Burda Druck India Private India Limited, which had been taken to NCLT by Vivek Bansal, an operational creditor of the company.
Under the IBC, a creditor, whether financial or operational, can take a corporate debtor to NCLT for defaulting on payment on debt after a stipulated timeline.
If the NCLT admits the case, the board of directors of the company is suspended with immediate effect & a resolution professional is appointed, who looks after the daily affairs of the firm. An order of moratorium is also passed which, in effect, prohibits any payment to any creditors until the CIRP is completed.
According to the latest data from the Insolvency & Bankruptcy Board of India, as many as 738 companies have so far spent more than 270 days in the CIRP. The resolution process of some companies such as Essar Steel took as many as 866 days, & saw multiple rounds of litigation in NCLT, NCLAT & the Apex Court.
A total of 3774 companies had been admitted to NCLT under IBC until March 31, of which the resolution for 57.5% or 2170 companies was still pending.
A mere 5% of the total companies admitted under IBC had seen their resolution process being completed, while 914 firms or 24.1% corporate debtors had been ordered to be liquidated so far, IBBI data showed.
Of the total Rs 3.84 lakh crore admitted claims of financial creditors, Rs 1.76 lakh crore had been recovered until March 31, according to the data. Among the 12 large stressed accounts that the Reserve Bank of India had asked banks to initiate insolvency proceedings against, only eight have seen a resolution so far.
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