Debt-laden IL&FS, the holding company of the infrastructure group, has filed an application with the Mumbai bench of National Company Law Tribunal seeking permission to talk directly with creditors about resolving its staggering debt problem that has shaken markets and hurt investor sentiment.
IL&FS said it will file an application for a scheme of arrangement under Section 230 of the Companies Act, 2013. This route, if permitted, will allow current IL&FS management to hold talks directly with creditors and propose a plan to resolve its problems.
Section 230 of the Companies Act is a mechanism to ensure institutional settlement of disputes between creditors and the company. It ensures that the company has a chance to save itself from insolvency or liquidation by doing a deal with at least majority of creditors.
IL&FS is a holding company with around 250 group companies, joint ventures and associates. The company defaulted on a series of debt repayments recently and its rating was downgraded from AAA to D in just over a month, rattling investors and calling into question the silence of rating agencies for so long. “The scheme will be prepared with applicable law and subject to necessary consents of the shareholders, creditors, regulators and board of directors of the relevant entities,” IL&FS Financial Services said in a filing to stock exchanges.
Both the creditor and the company can approach the NCLT. A creditor can move NCLT through IBC. Companies can approach the bankruptcy court through Section 230 of the Companies Act for any kind of relief in settling dues with creditors. In case of creditors taking a defaulting company to NCLT under IBC, a committee of creditors takes over the management and a resolution professional is appointed.
‘WISE DECISION’
The resolution professional comes up with a resolution plan. In case of a company approaching NCLT under Section 230 of the Companies Act, the company’s management proposes a plan to settle with creditors. “If you can anticipate that creditors can approach NCLT under Insolvency and Bankruptcy Code, it is a wise decision to approach NCLT under Section 230 of the Companies Act, which can help the management retain control on the company,” said Ashish K Singh, managing partner Capstone Legal.
IL&FS Financial Services has defaulted thrice on repayment on commercial papers in the last fortnight. It is looking to sell over 15 businesses and stakes in subsidiaries to repay dues. Small Industries Development Bank of India (Sidbi) is separately planning to take IL&FS to NCLT over default of `9,500 crore inter-bank corporate deposit. “If a petition is pending under Section 230, ordinarily the NCLT will ask creditors to wait for hearing under the Companies Act before moving with the IBC proceedings,” said Singh.
The scheme will require approval from 75% shareholders and creditors. “This case will a first and if there is inconsistency with hearing under IBC and Section 230 of the Companies Act under NCLT, IBC has a special Section 238 of the IBC will take precedence,” said another lawyer with a legal firm. “Creditors will take control and will appoint a resolution professional.” After the IL&FS default, market is worried over the looming crisis at the coming quarters. Non-banking finance companies are facing liquidity crisis after rating downgrade of IL&FS.
Source: Economic Times