Promoters, Shareholders of Corporate Debtor not barred under Sec 12A to settle insolvency, NCLAT

The National Company Law Appellate Tribunal (NCLAT) has held that Section 29A of the Insolvency and Bankruptcy Code, 2016 is not applicable to an application under Section 12A and thus promoters and shareholders of the corporate debtor are entitled to settle the matter in terms of the Section..The NCLAT has further held that if the assets of a Corporate Debtor are the result of “proceeds of crime”, it would always be open to the ‘Enforcement Directorate to seize the assets in accordance with the Prevention of Money Laundering Act, 2002..It has nonetheless clarified that even if the assets of the Corporate Debtor are held to be “proceeds of crime”, a prayer for withdrawal of an insolvency application cannot be rejected by the Adjudicating Authority if the Promoter/Director/Shareholder in their individual capacity are able to satisfy the creditors..The order was passed by a three-member bench of Chairperson, Justice SJ Mukhopadhaya, Member (Judicial), Justice AIS Cheema and Member (Technical) Kanthi Narahari in a batch of appeals against an order passed by Adjudicating Authority i.e National Company Law Tribunal, Mumbai..The appeals pertained to the rejection of a Section 12A application filed at the instance of the Promoter of the Corporate Debtor, Sterling Biotech, which was approved with more than 90% voting share of the ‘Committee of Creditors..The application was rejected by the Adjudicating Authority on the ground that since a promoter is not eligible to file the ‘resolution plan’ under Section 29A, he could not file an application under Section 12A as well, thus forcing the company into liquidation..Lead banker in the case, Andhra Bank also opposed the NCLT order..Meanwhile, the Enforcement Directorate, SEBI, Ministry of Company Affairs and the Central Bureau of Investigation also appeared before the Appellate Authority to submit that the Corporate Debtor and its promoters, Directors and officers etc were currently under investigation..In light of the ongoing investigation, the Enforcement Directorate argued that the assets of the Corporate Debtor were based on the proceeds of the crime and therefore, it could not be disposed of..After reviewing the IBC and the ILC Report of March 2018 as well as the Supreme Court’s decision in the Swiss Ribbons case, the NCLAT held that the Promoters/Shareholders were “entitled to settle” the matter in terms of Section 12A and in such cases, it was always open to an applicant to withdraw an insolvency application under the IBC..“..we hold that Section 29A is not applicable for entertaining/considering an application under Section 12A as the Applicants are not entitled to file application under Section 29A as ‘resolution applicant’.”.Coming to the facts at hand, the NCLAT noted that the corporate insolvency resolution process was initiated pursuant to an application under Section 7 filed by the Andhra Bank and the application under Section 12A for withdrawal of insolvency proceedings was approved by the Committee of Creditors with more than 90% of the voting share..It was thus not open to the Adjudicating Authority to reject the same on the ground of ineligibility under Section 29A, it said..Addressing the concerns raised by the Enforcement Directorate, the NCLAT said,.“In so far the assets of the ‘Corporate Debtor’ is concerned, if it is based on the proceeds of crime, it is always open to the ‘Enforcement Directorate’ to seize the assets of the ‘Corporate Debtor’ and act in accordance with the ‘Prevention of Money Laundering Act, 2002..”.It further added that even if the assets of the Corporate Debtor are held to be “proceeds of crime”, a prayer for withdrawal of an application under Section 7 could not be rejected by the Adjudicating Authority if the Promoter/Director/Shareholder in their individual capacity were able to satisfy the creditors..“..it will not come in the way of the individual such as ‘Promoter’ or ‘Shareholder’ or ‘Director’, if he pays not from the proceeds of crime but in his individual capacity the amount from his account and not from the account/assets of the ‘Corporate Debtor’ and satisfies all the stakeholders, including the ‘Financial Creditors’ and the ‘Operational Creditors’. There is nothing on the record to suggest that the individual property of the ‘Promoter’ / ‘Shareholder’/ ‘Director’ who proposed to pay the amount has been subjected to restraint by the ‘Enforcement Directorate’.”.In view of the above, the rejection of Section 12A application for withdrawal of insolvency proceedings and the subsequent order of liquidation were set aside..The NCLAT ordered,.“All these appeals stand disposed of with liberty to the ‘Enforcement Directorate’, the ‘Central Bureau of Investigation’, the ‘Ministry of Corporate Affairs’, ‘Securities and Exchange Board of India’ and the other Authorities to continue/take any action against the Company, ‘Promoter’/ ‘Shareholder’/ ‘Director’ under the existing laws and will continue irrespective of the settlement made by the individual ‘Promoter’/ ‘Shareholder’/ ‘Director’ with the creditors under Section 12A of the ‘I&B Code’.”.The Promoter was represented by Senior Advocate Rajeev Ranjan with Advocate Sankalp Sharma, Aarif Akhtar..CoC was represented by Advocate Siddharth Sharma and Andhra Bank was represented by Advocate A.K. Mishra..The Resolution Professional was represented by Advocate Pranav Vyas and Satendra K. Rai..The Liquidator was represented by Advocates Sandeep Bajaj, Soayib Qureshi, Deepanjan Dutta and Naman Tandon..The Enforcement Directorate was represented by Advocate Nitesh Rana with Special Public Prosecutor Adil Ali Khan..[Read Judgement].Bar & Bench is available on WhatsApp. For real-time updates on stories, Click here to subscribe to our WhatsApp.