NCLT's Mumbai bench queers the pitch by indulging defaulting promoters; Centre must bring ordinance to neutralise tribunal's stand

The government on 23 November, 2017 amended the Insolvency and Bankruptcy Code, 2015 (IBC) to introduce a new section 29A to ban promoters and their relatives from participating in the bidding process for the self-same company whose ruination they had presided over willy-nilly.  Rightly, the amendment did not discriminate between wilful defaulters and genuine defaulters because that by itself would have opened the sluice gates for a fresh bout of unproductive litigation and the Pandora’s box. Wilful default is left to other laws to discipline. Be that as it may.

The Mumbai Bench of the National Company Law Tribunal (NCLT) has needlessly queered the pitch by taking up cudgels for the promoters of the companies referred to NCLT under the IBC. Taking a needless and presumptuous hyper technical ground, it has ruled that cases that were referred to NCLT prior to 23 November, 2017 are not hit by the above amendment and thus their promoters can participate in the bidding process.

It is amazing that the tribunal has chosen to undermine the solemn law at a time the government vide an amendment to section 29A vide an ordinance dated 6 June 2018 has taken pains to close the escape routes---comprehensive amendment to the definition of relatives so as to remove the wiggle room that existed enabling wily promoters to bid through their kith and kin (proxies) as well as through labyrinthine holding company subsidiary maze. Judicial and quasi judicial bodies should further the cause of a law instead of undermining it unless it is unconstitutional or against the principles of natural justice. The tribunal is clearly guilty of undermining both the spirit and the letter of the solemn amendment.

Representational image. News18

Representational image. News18

Pray what fundamental right of the promoters was violated by the amendment proscribing them from regaining control of the company for a pittance after having more often than not lining their own pockets through over-invoicing of imports and other devious means?  The Supreme Court of India has said in a catena of cases that retrospective amendment is bad and unconstitutional only when it affects the fundamental rights and impinges on the principles of natural justice. For example, generally the constitution courts would be loath to sustain an amendment that imposes a tax burden from a retrospective date unless such retrospectivity is by way of clarification of the position. It certainly cannot be the birthright much less a fundamental right of a defaulter wilful or otherwise to claim that he should be allowed to stay in the saddle come what may.

The central government has two options---file an appeal to the High Court against the patently disruptive and unjustified order of the tribunal and obtain an immediate stay. The other alternative is to bring in yet another ordinance to provide explicitly for retrospectivity. The latter course is preferable.

To be sure, all is not well with the present bidding process so much so that hair-cuts taken by the companies are likely to be much more than warranted. Bid in a sealed envelope is passé. Competitive continuous open bidding is the norm so as to realise the best price. Of course collusion among the bidders cannot be ruled out but generally large number of bidders bidding transparently through electronic mediums can prevent the mischief to some extent.

The jury is still out on the thaw in rigor of the ban on promoters from bidding for MSME companies. The rationale is being small, no big business would evince interest in acquiring them and therefore willy-nilly their promoters have to be indulged. This is a specious argument. For a big ticket acquirer, a series of such piecemeal MSME acquisitions would tote up to a sizeable value addition and synergy to his business. In any case the extenuating circumstances if any for MSME companies do not exist for big ones.

While neutralising the mischief of the tribunal through an ordinance (the preferred route vis-à-vis appeal to High Court) the government must drop the hare-brained move to treat home buyers at par with secured financial creditors. To be sure, home buyers stranded midstream by builders deserve empathy and sympathy but treating them at par with banks and other financial creditors could be counterproductive. To wit, a bank can take a 70 percent haircut though undeservedly but can a poor home buyer?  Is it fair to put him on the same pedestal as a financial institution or a bank? No, for home buyers the remedy lies in the strict implementation of the Real Estate Regulation Act (RERA).

(The author is a senior columnist and tweets @smurlidharan)

Firstpost is now on WhatsApp. For the latest analysis, commentary and news updates, sign up for our WhatsApp services. Just go to and hit the Subscribe button.

Updated Date: Jun 14, 2018 10:21:34 IST

Also See