Ex-promoters can’t hold stake in insolvent firms acquired by others: SC

The Supreme Court has said the promoter of an insolvent firm cannot continue holding residual stakes in the company after it has been acquired by another entity under the Insolvency and Bankruptcy Code(IBC).

A Bench comprising Justice M R Shah and Justice Krishna Murari on Friday dismissed the appeal by Bhushan Steel’s promoters Neeraj Singal and others. The apex court said it agrees with the orders of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) in this case and sees no merit to pass a different order.

The promoters were holding 2.35 per cent shares in the company even after Tata Steel acquired 72.65 per cent shares during the resolution process under the IBC.

“The appellants are the erstwhile promoters and therefore, they cannot be continued to be in the company in any capacity, maybe as shareholders, as rightly observed by the NCLAT,” the SC order stated.

Bhushan Steel in 2017 had a debt of about ~56,000 crore towards lenders. The same year, the Reserve Bank of India (RBI) identified it as among the 12 big loan defaulters to undergo insolvency.

On May 15, 2018, the NCLT approved Tata Steel’s bid for Bhushan Steel. However, the promoters of Bhushan Steel and L&T, one of the lenders, challenged the Tatas’ bid before the NCLAT

Tata Steel’s resolution plan was to acquire Bhushan Steel for ~35,200 crore, pay another ~1,200 crore over the next 12 months to creditors, and then convert the remaining debt owed to banks to equity. The promoters of Bhushan Steel alleged that Tata Steel was disqualified from the bid as a subsidiary of it was facing trial in the United Kingdom. By this logic, it was disqualified to participate in the resolution plan for Bhushan Steel, the promoters said.

The NCLAT rejected this contention and said the subsidiary is a “connected person” of “Tata Steel Ltd”. “It does not attract the disability under Section 29A of the IBC. We also hold that ‘Tata Steel Limited’ is eligible to file the resolution plan,” said the NCLAT.

Meanwhile, L&T submitted that the acquisition amount put forth by the Tatas was not fair to the lenders. The NCLAT rejected this argument, too, and said the Tatas’ resolution plan was fair and equitable to all lenders.

On the lines of these orders, the Supreme Court on Friday said that if the submission on behalf of the appellants is accepted, the resolution plan shall not be workable at all.

“The appeal stands dismissed,” said the court.