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NCLAT allows 22 domestic subsidiaries of IL&FS to service debt obligations

On October 15 last year, the NCLAT had allowed IL&FS and its 348 group entities to halt debt repayments until a resolution plan was worked out.

The National Company Law Appellate Tribunal (NCLAT) on Monday directed 22 domestic subsidiaries of Infrastructure Leasing & Financial Services Ltd. (IL&FS) to service their operational and financial debt obligations. The tribunal has also lifted the moratorium on debt repayments by 133 offshore group entities.

The two-member bench, headed by Justice S J Mukhopadhaya, also approved appointment of former Supreme Court judge Justice D K Jain to supervise resolution process of the IL&FS group.

"We allow (companies under green categories) the board to permit the company to service debt obligations as per schedule," the firm said. The NCLAT was hearing the government plea over IL&FS group.

On October 15 last year, the NCLAT had allowed IL&FS and its 348 group entities to halt debt repayments until a resolution plan was worked out.

The newly-appointed board of IL&FS had subsequently decided to stop servicing debt across entities, including those that had the cash to support such repayments. This decision alarmed investors who feared that the ring-fenced special purpose vehicle (SPV) structure commonly used in infrastructure financing was being challenged.

Earlier this month, the Corporate Affairs Ministry submitted the debt resolution plan for IL&FS. The entire resolution process would be based on the principles enunciated in the Insolvency and Bankruptcy Code (IBC), as per the ministry. Under the plan, the government has categorised IL&FS group companies into green, amber and red, based on their respective financial positions.

As many as 22 companies under the green category would be those that continue to meet their payment obligations.

Amber category would be for those companies that would not be able to meet their obligations but can meet only operational payment obligations to senior secured financial creditors. There are 10 Amber category entities which "are permitted to make only payments necessary to maintain and preserve the going concern".

"Companies (22) falling in the red category are the entities which can not meet their payment obligations towards even senior secured financial creditors," as per the resolution plan. Such companies would be permitted to make payment necessary to maintain and preserve the going concern status.

In another development, the Institute of Chartered Accountants of India (ICAI) will be reopening the books of the financially crippled IL&FS.

The Mumbai bench of the National Company Law Tribunal (NCLT) had, on January 1, directed the reopening of the books and recasting of the financial statements of IL&FS, IL&FS Financial Services, IL&FS Transportation Networks between fiscal years 2012-13 to 2017-18.

In view of the substantial public interest involved in the matter, ICAI Accounting Research Foundation (ICAI ARF) will be carrying out the task, an official statement said.

The whole exercise will be independent, it said, acknowledging the Serious Fraud Investigation Office (SFIO) is also carrying out an investigation on IL&FS and its group/ subsidiary/associate companies.

Being a 'section 25' company, whose purpose is not-for-profit, ICAI ARF can outsource this assignment so that it is over within a reasonable period of time, the statement added.

The NCLT had allowed for the reopening under Section 130 of the Companies Act to ascertain financial mismanagement. The government, which took over the board of the persified and complex IL&FS last year, wanted to check the balance-sheets of the crippled group and its two listed subsidiaries.

Earlier, SFIO and ICAI reports had indicated that the accounts were prepared fraudulently and negligently in the last five years by the previous management.

Statutory bodies including the Reserve Bank, markets watchdog Sebi and the Income Tax Department gave their 'no objection' for restating the accounts.

However, the auditors Ernst & Young-owned SRBC & Co, Delloitte Haskins & Sells and KPMG-affiliate BSR Associates had opposed the move, citing that they had no role in the alleged frauds and arguing financial accounts are made by the company and not auditors.