News & Media

Promoters will look to settle out of court, post IBC tweak

Dec 4, 2017
  • Published by : The Economic Times
  • Author(s) : Babu Sivaprakasam
  • Stung by the latest amendments to the Insolvency and Bankruptcy Code (IBC), promoters will increasingly look to settle small disputes with operational creditors outside court rather than risk losing their company, lawyers and professionals working with companies said.

    On November 22, President Ram Nath Kovind gave his assent to a new section in the IBC, which makes wilful defaulters with loans classified as NPAs for one year or more ineligible to bid for their companies. Operational creditors with unpaid dues of even a few lakh rupees have taken the lead in filing IBC cases for recovery.

    Since the law came into force in December last year, more than 75% of the 4,500 cases filed have been by operational creditors as they can expect a time-bound redressal of their complaints. Many of these complaints are a nuisance to promoters due to disputes on the amount due. Now after the amendment, if the promoters ignore these complaints and the case is admitted, a promoter, provided he is proven to be a wilful defaulter, can be debarred from bidding from his own company.

    “The 14-day window before the admission of a case may prove to be critical for both the operational creditors and corporate debtors alike as one may end up only getting liquidation value while the promoters may be ineligible to bid pursuant to the Ordinance. Prudence shows that parties will rather choose to settle than expose themselves to such risk,” said Babu Sivaprakasam, partner, Economic Laws Practice. There is a 14-day window between filing and admission of the case. Promoters would now prefer to settle small cases out of court in this window, Sivaprakasam said. Many of the cases are for non-payment of dues by suppliers or small and medium enterprises (SME). These may now be settled off court.

    Already there are instances of companies like L&T and Reliance Communications NSE -3.85 % settling cases out of court because once a case is admitted there, a resolution within a 270-day time frame is mandatory else it could all end in liquidation. In case of liquidation, operational creditors are behind financial creditors and other constituents like employees, which means chances of them recovering their dues is low.

    “It all depends on the financial situation of the company. If they do not have the means then operational creditors will not get anything if the case is admitted because they are last in line. Insolvency is now the quickest recourse to an operational creditor but they also have to analyse whether the company can pay back or no,” said an executive from a consultancy.

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