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ROLE OF PROMOTERS IN IBC

India’s bankruptcy law, the Insolvency and Bankruptcy Code, 2016 (IBC), intends to streamline the current structure by establishing a unified insolvency and bankruptcy regulation. The bankruptcy code offers a one-stop shop for dealing with insolvencies, which was previously a drawn-out process without an economically sensible resolution. The code seeks to safeguard the interests of small investors and streamline corporate transactions.

Promoters are crucial to a company’s operation in the Indian corporate world. They are the ones who had the idea to start the business, and as a result, they have sway over other people. Because of their fiduciary relationship with the company, the promoters are obligated to act with loyalty, care, and protection on its behalf.

The film formation process can be broken down into four stages: 1. Promotion; 2. Registration; 3. Capital Raising; and 4. The start of business.

In this context, the term “promoter” is used to refer broadly to the first actions taken to register and float the company. Promoters are the people who take on this work of promotion. An individual, syndicate, association, partner, or business can be a promoter.

Definition of the promoter in the Companies Act

In the legal sense, the term promoter is defined under section 2(69) of the Companies Act, 2013 as a person: – 1. who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; 2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or 3. in accordance with whose advice, directions or instructions the BoD of the company is accustomed to act.

The individual who facilitates the incorporation and organisation of the corporation plays the position of a promoter with regard to the creation of a company. He gathers those who show an interest in the venture, helps secure subscriptions, and starts the processes that result in the formation itself. This position was clarified in the landmark case of Erlanger v. New Sombrero Phosphate Co. 

Suppose a promoter of a company fails to make full disclosure of the pre-incorporation of the contract. In that case, the company can either rescind the contract and recover the purchase price, recover the profits made or claim damages for breach of fiduciary duty. This has been enumerated in sections 26, 34 and 35 of the Companies Act. 

Role of the promoter in CIRP

Even if the debt of another financial creditor is in default, any financial creditor may still file for CIRP. On the other hand, a corporate debtor must receive a demand notice from an operational creditor, and the CIRP application can only be submitted if the corporate debtor does not contest the debt within 10 days after receiving the notice of demand. The CIRP must be finished within 180 days of the admission date, although this deadline may be extended by an additional 90 days with an NCLT order.

The Insolvency and Bankruptcy Code, 2016, is regarded as one of the ground-breaking changes the government made to make it easier to revive or liquidate commercial enterprises promptly. The corporate world has been rattled by the paradigm change from “debtors in possession” to “creditors in control.”

Whether a promoter has any power when the company of which he is a promoter is placed under CIRP to save the company is a question that emerges in this situation. There is no definitive answer to this question because, in the past, promoters of companies have had their resolution plans approved by the CoC and allowed to be posted, whereas, more recently, promoters have not been permitted to post-resolution plans for the restructuring of failing businesses that have been brought about solely by the promoters.

The Insolvency and Bankruptcy Code of 2016 designates resolution plans as the “way-out” for bankrupt enterprises that fall within its purview. The resolution plan is submitted to the adjudicating body for approval after being authorised by the committee of creditors. Any person who submits a resolution plan to the resolution professional is referred to as a resolution applicant, as defined under section 5(25) of the Code. As a result, a resolution applicant could have been any individual: a creditor, a promoter, a potential investor, a worker, or anybody else. This turned into a fatal legal flaw that gave defaulting promoters back-door access to the corporate debtor’s assets at drastically reduced prices.

Conclusion

A promoter is someone who facilitates the company’s incorporation and organisation. He brings together those who show an interest in the business. As a result, it is accurate to say that a promoter plays a crucial part in the company’s smooth operation. After all, no one knows the work of a company better than the promoters, who convert this vision of the company’s formation into reality.

When a business defaults on its debt obligations, the creditors or the debtor themselves may commence CIRP against the defaulting business in an effort to restructure and revive it; if this is unsuccessful, the business will be liquidated. Here, CIRP’s goal is to revitalise the struggling business and concentrate on maximising the value of its assets in order to prevent the company from going out of business and to preserve the entrepreneurial spirit. It is reasonable to claim that only insiders are to blame for the company’s collapse; yet, this raises the question of whether or not a promoter should be allowed any authority when a company goes under CIRP.

By Ananya Bhat