Changes in IBBI norms to prevent backdoor entry of ex-promoters in cos under liquidation: Experts

New Delhi: The amendments in the IBBI regulations will prevent the backdoor entry of former promoters in companies under liquidation by covering the “loopholes” in the law and are in line with the objective of the Insolvency and Bankruptcy Code (IBC), experts said.

The Insolvency and Bankruptcy Board of India (IBBI) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

Under the amendments introduced to the liquidation process regulations, persons who were ineligible are now barred from being part of any compromise or arrangement at the stage of liquidation.

Furthermore, a secured creditor who chooses to sell secured assets independently also cannot sell the same to a person who is ineligible under the IBC.

“This has been introduced to specifically overrule the decisions passed by some NCLTs, whereby it was held that no bar operated on the sale of secured assets to the ex-promoters of the Corporate Debtor if such sale is carried out by a secured creditor under Section 52 of the IBC,” said Punit Dutt Tyagi, Executive Partner, Lakshmikumaran and Sridharan Attorneys.

Rachit Sharma, DGM, Taxmann said the new amendment to IBC norms restricts secured creditors from selling or transferring assets of a liquidating – company to any person who is not eligible to submit an insolvency resolution plan.

“With the new amendment, the legislature has not left any loophole which could allow the ex-promoters and other ineligible persons to buy the stressed asset or even participate in a scheme of the arrangement,” he said.

According to him, the lawmakers’ intent are very clear, not only does the law bar the ex-promoters from participation under the Code, but it now goes on to bar sale outside the liquidation process also.

The amendment is in line with the intent of the Section 29A of Code preventing any sort of re-entry of ex-promoters at any point of resolution/liquidation process, he said.

Another legal expert, L Viswanathan, Partner, Cyril Amarchand Mangaldas, said the changes in the regulations “is in line with the objective of the IBC” to disallow persons who are disqualified from submitting a resolution plan from re-acquiring the company through the mechanism of a scheme or in enforcement of security interests by secured creditors.

In fact, the amendment goes further to provide that such persons “shall not be a party in any manner to such compromise or arrangement thereby even possibly disenfranchising such persons also from being eligible to vote as members on any scheme of compromise or arrangement”, Viswanathan said.

Mehul Bheda, Partner, Dhruva Advisors LLP was of the opinion that the amendments have been introduced to bring liquidation on par with the resolution process.

The restrictions placed on the promoters under Section 29A of the code are now equally applicable to liquidation.

“This means that no promoter, who is barred from the resolution process, can make a backdoor entry by buying the assets of the company under liquidation or even participating in a scheme of arrangement under Section 230,” Bheda added.

The IBC is the bankruptcy law which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.