Should promoters be banned altogether from participating in the revival of companies which went sick under their guard? Or should they face restrictions only if the sickness was due to specific wrongs they have committed? These questions have troubled insolvency regulators and lawmakers alike.
Indeed, alarmed by attempts by errant promoters to acquire back the companies they ran, and that too at deep discounts, the lawmakers made urgent amendments in 2017 itself, the second year of life of the Insolvency & Bankruptcy Code (IBC), and barred such promoters from participating in revival of such companies. The bar was widely worded and covered promoters and even other persons on multiple counts.
There have been several cases where the question was whether such disqualified persons were trying to take back their companies through various means. The Supreme Court in 2018 elaborately ruled on such issues in the case of revival of Essar Steel. It highlighted the fact that the IBC contains widely-worded restrictions barring not just errant promoters and other persons, but also persons acting in concert with them or connected with them. Even the seemingly opaque corporate veil would not stop the court — and hence the insolvency regulators — from seeing the underlying reality. The controversies never seem to stop though.
A Nuances, Commercial View
But before we examine the issues in more detail, we come back to the more fundamental question. Should promoters of such companies in insolvency be barred from participating in their revival?
The cynical arguments in favour would seem strong. Surely the promoters have taken care of themselves and siphoned funds — in India or abroad? Or they have ‘enriched’ relatives, and connected persons through loaded transactions leaving a hollow shell of the company? Even if they did not indulge in such things, the argument goes, surely the promoter is incompetent and, if given a second chance, drown the lenders and creditors once again?
The law, however, took a nuanced and commercial view. At the outset, while promoters are not given any preference, they are not discriminated wholesale either. A specific list of disqualifications have been made. Those entering into ‘preferential’ transactions whereby related parties are enriched at the cost of the company are barred. So are wilful defaulters. Also those who have been barred by SEBI from accessing the capital markets. So on.
While generally, these disqualifications are about those who have carried out illegal/harmful activities, promoters and others are not disqualified solely because they took that, or another company, into insolvency. Yet there is one more disqualification which borders on punishing business failure. If a person is connected to a business which has become a non-performing asset, and a year has passed but such default is not cured, such person is also disqualified. Even this bar can be justified on the ground that if a person is already in financial trouble, how can they expect to enter into yet another venture?
It may also be remembered that the scheme of the IBC gives primacy to the wisdom of the Committee of Creditors. Barring such disqualifications, they have wide freedom in accepting or rejecting a particular proposal on merits, and at their choice.
Tough To Establish Links
However, the question is not whether any of the statutory disqualifications are unjustified. The question is whether they are so widely worded that they could cause several problems in practice. The disqualification, for example, applies not only to the errant persons themselves, but also to ‘persons acting in concert’ with them. This term, apparently borrowed from the SEBI Takeover Regulations, has a wide connotation, and covers several persons who may not even have formal links. Even persons ‘connected’ in the specified manner are disqualified, and this word too has been given a wide meaning.
These deeming and widely worded restrictions could end up covering even independent persons and groups who by the fortuitous circumstance of being related to or otherwise have some sort of joint arrangement in a business becoming disqualified.
The other problem is the proving of such connection or acting ‘in concert’. In the Essar Steel case before the Supreme Court, there was fairly deep investigation carried out and connections even in countries such as Bermuda was unearthed. Further, the background of entities such as discretionary trusts were also unravelled. Such inquiry and investigation, however, is a costly affair, and often faces roadblocks of non-cooperating countries that swear to secrecy.
That apart, India particularly is known for informal arrangements between parties where trust, relations, and community network often substitute formal agreements. Tax evasion/avoidance has almost been like a national sport and industry, as most recently the demonetisation exercise demonstrated. Detection of such connections and ‘acting in concert’, and then proving it before an impartial adjudicator can be very difficult indeed.
More Likely Than Not
That said, multiple laws, rulings, and legal principles laid down do help. There is a rich set of judicial precedents under the SEBI Takeover Regulations, the SEBI Insider Trading Regulations, and even under competition law. Courts have, for example, laid down useful principles one of which is the benchmark of ‘preponderance of probability’. In cases of securities fraud and similar acts, a well-accepted principle is that the level of proof applicable is whether it is more likely than not that such a wrong has taken place. This is contrasted with the principle applied for criminal proceedings of proving beyond reasonable doubt. The term ‘persons acting in concert’ also specifically covers even unwritten agreements, and understandings. This too helps the adjudicating authority, and the courts to take a view from the underlying circumstances that there indeed is a connection which disqualifies the parties.
To conclude, adjudicating authorities and courts may well adopt these principles, and apply them in insolvency cases too to disqualify those who attempt to use legal and other subterfuges. At the same time, courts may also help in those cases where parties get unintentionally disqualified due to the wide wording, albeit with the difference that the onus of proof of not being connected may be shifted to such party. All in all, the law, with all its admitted overreach, and even vagueness, is still apt to India’s circumstances. Even if its application in actual cases may continue to be a challenge, the principles are available.