Should an insolvency court be worried about the commercial considerations in the resolution of an insolvency case or leave that to the stakeholders? While this could be a rhetorical question, the National Company Law Tribunal (NCLT) did not think so, and risked setting a dangerous precedent under the Insolvency and Bankruptcy Code (IBC).
In case of the bankrupt Dewan Housing Finance Corp. Ltd (DHFL), the NCLT decided that creditors must give erstwhile promoter Kapil Wadhawan, accused of fraud involving the firm, a chance to present his proposal of settlement.
The National Company Law Appellate Tribunal (NCLAT) stayed the order of the NCLT on Tuesday, and will hear the matter on 25 June. But some damage seems to have already been done by the NCLT. The order may encourage more errant promoters to seek a way to get back their business they ran aground for a cheaper price through settlement offers. The order has triggered a similar settlement offer from Jaypee Infratech promoter Manoj Gaur, according to media reports.
This dilutes the IBC’s section 29A that prevents promoters from taking back their companies after having run them aground.
The premise of supporting an offer from Wadhawan was that it’s commercially more acceptable than that of the winning bid from Piramal Enterprises Ltd. Wadhawan has offered to repay the entire ?91,000 crore over a period of seven-eight years and said that all stakeholders will be fully compensated. Piramal, on the other hand, has agreed to pay roughly ?37,000 crore for the firm on the rationale that it is the fair value of the enterprise arrived at after scrutinizing its books. Ergo, deep haircuts will be taken by all financial creditors.
But commercial decisions cannot be divorced from reality. It should be noted that Wadhawan is in prison for financial wrongdoings involving DHFL. Forensic audits have found large gaps in the balance sheet of the firm. Further, both the administrator and creditors believe that Wadhawan’s offer of selling his assets for the settlement could be misleading.
News Source:- Livemint