NCLAT OPENS WINDOW TO LET COMPANIES EXIT RESOLUTION PROCESS in Burka Druck India Vs Vivek Bansal
Channel: R V Seckar
Date: 2020-07-19

NCLAT OPENS WINDOW TO LET COMPANIES EXIT RESOLUTION PROCESS — AND TO MAKE OUT OF COURT SETTLEMENT




EXIT ROUTE OFFERED BY NCLAT
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 and a moratorium has been imposed by the National Company Law Tribunal (NCLT) under Insolvency and 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 and settle with lenders.


NCLAT ORDER MAY HELP THE COMPANIES ALREADY UNDER IBC PROVISION 


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 Covid-19 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.


EXIT ROUTE OFFERED BY NCLAT IN
Burda Druck India Vs Vivek Bansal


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.


NCLAT LAND MARK JUDGEMENT


In its judgment, a three-member bench, headed by acting chairperson Justice Bansi Lal Bhat, held that since the corporate debtor and operational creditor, which had taken the company to NCLT, had “amicably settled”, the CIRP process was no longer relevant, and thus stopped.


“The respondent company is released from all the rigour of law and is allowed to function independently through its board of directors with immediate effect,” the three-member bench held in its judgment delivered on July 14 2020 and 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.


BOARD IS DIVESTED WITH ITS POWER ONCE THE COMPANY IS ADMITED TO IBC BY NCLT 
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 and 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 and 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, and saw multiple rounds of litigation in NCLT, NCLAT and the Supreme Court.


3774 COMPANIES HAD BEEN ADMITTED TO NCLT


A total of 3774 companies had been admitted to NCLT under IBC until March 31 2020, of which the resolution for 57.5 per cent or 2170 companies was still pending.
A mere 5 per cent of the total companies admitted under IBC had seen their resolution process being completed, while 914 firms or 24.1 per cent 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.


Why this case is important ?


Withdrawal of CIRP application 
Before admission 
Rule 8 of IBBI rules allowed Adjudicating Authority to permit the withdrawal of application on request made before its admission.
After admission 
Considering the objective of the code, NCLAT in Mother’s Pride Dairy case, was of the view that such withdrawal pursuant to settlement cannot be permitted after admission due to involvement of interest of other creditors. However, Hon’ble SC exercising the inherent power under Article 142 allowed the settlement in that case. After the Lokhandwala Kataria and Uttara Foods & Feeds case having similar facts approaching the apex court, it recommended relevant amendment to be introduced in the code.