Promoters under liquidation can settle with creditors – NCLAT

Providing an opportunity to promoters seeking to retain control of their companies that are under  bankruptcy, the National Company Law Appellate Tribunal (“NCLAT”) has recently held that shareholders and owners stipulate a settlement with creditors when their company is under liquidation and an official liquidator has already been appointed by the insolvency court.

The NCLAT order has far and wide impact over resolution of stressed assets, specially those where promoters are seeking a settlement after the initiation of bankruptcy proceedings in the National Company Law Tribunal (“NCLT”).

In accordance with the amendments made to the Insolvency and Bankruptcy Code (“IBC”), promoters are barred from participating in the resolution process of their respective stressed assets. Due to the order in question, if they are now allowed to file an application for approval of settlement with creditors, numerous promoters will jump at the opportunity as it will allow them to retain control of their respective companies while repaying the debt.

The Appellate Tribunal held : “Liquidator is only an additional person and not exclusive person who can move application under Section 391 of the old Act when the company is in liquidation. Looking to these Judgements, we are unable to support the view taken by NCLT that the Appellant could not have filed the Petition under Section 391 of the old Act“.

While NCLAT has affirmed that it had no reservations over the applicability of a outline of compromise and arrangement even when the liquidation process is undergoing, NCLT may still accept or reject the offer of settlement under the provisions of Companies Act.



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