Category: Banking & Finance

Former promoters of defaulting companies that are under the insolvency process can hope to take back control of their companies if the debt resolution process fails to find new owners. The recent decision by consortium of lenders led by IDBI Bank to allow C Sivasankaran to take ownership of his company by paying an amount higher than the liquidation amount may have raised hopes of erstwhile promoters such as Naresh Goyal, Anil Ambani and Punj Lloyd. The companies once owned by these promoters including Jet Airways, Reliance Communications and Punj Lloyd are heading towards liquidation under the IBC process.

Bad precedent

Bharat Chugh, Independent Counsel and former Judge, said the amount for which IDBI Bank finally appears to have settled is a measly 10 per cent of the total outstanding. These settlements may create perverse incentives for defaulters who can get away with a mere rap on the knuckles after defaulting on millions of dollars worth of loans, which is all public money. This would neither lead to responsible banking and lending, nor responsible repayment, and creates a bad precedent.

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While the IDBI clarified that the CBI investigation will still continue, but everyone knows how long criminal trials take in this country and the fact that the real deterrent in such cases is the IBC process and liquidation, which won’t happen now – given the fact that the matter is settled, said Chugh.

To be sure, provision for withdrawal of the corporate insolvency resolution process exists under Section 12A of IBC if the creditors are agreeable to one time settlement (OTS) offered by the corporate debtor. It is for the NCLT to take a call. If the Tribunal gives its go ahead then OTS can be operationalized.

But experts said that withdrawal of bankruptcy proceedings from the NCLT after the stage of admission was considered to be antithesis to the architecture of the Insolvency and Bankruptcy Code. Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP (Civil Appeal No. 9279 of 2017) was really, the first instance where the Apex Court had allowed a settlement between a the corporate debtor and creditors by taking recourse to its wide powers under Article 142 of the Constitution of India, which it may use to ‘pass such decree or make such order as is necessary for doing complete justice’ in any cause or matter.

“The fact that IDBI Bank and other related creditors have decided to withdraw the bankruptcy proceedings is certainly a shift from the usual. It is uncommon for banks and financial institutions to accept a settlement, particularly at a ripe stage of proceedings under the IBC. After all, we are told to believe that the IBC proceedings are not to be treated as tantamount or in the nature of recovery proceedings. It really is supposed to be the last resort,” said a market expert.

However, Abhishek Gupta, Principal Associate, MZM Legal said the IBC was enacted to give creditors control over an insolvent company, to realise maximum value as per their commercial discretion. The Supreme Court has upheld that the creditors discretion in all commercial matters, including the decision to withdraw insolvency proceedings. Hence, such discretion cannot be questioned, he added.

In the absence of bidders, value maximisation would impel creditors to accept the promoters offer, which is better than liquidation, he added.

The provisions relating to CIRP came into force on December 1, 2016. Since then, a total of 4139 CIRPs have commenced by the end of December 2020, as per IBBI data. Of these, 601 have been closed on appeal or review or settled; 378 have been withdrawn (including due to full settlement with the applicant, full settlement with other creditors, other settlements with creditors, among others); 1126 have ended in orders for liquidation and 317 have ended in approval of resolution plans.

Faisal Sherwani, Partner, L&L Partners said CIRP proceeding involves all creditors of the debtor. So, naturally, the Code discourages individual attempts at settlement.

Post-admission of insolvency, withdrawal is permitted if 90 per cent of Committee of Creditors (CoC) approve the proposal if Section 12A stands and the interests of all concerned are weighed appropriately, said Sherwani.

No harm

Stating that there is no harm in promoters reclaiming their business, Daizy Chawla, Senior Partner, Singh & Associates said the promoter knows better about the business and there is no harm if the promoters (who are not barred by Section 29A of the I&oB Code 2016) to enter into an arrangement with Creditors to settle the issue instead of reaching to the consequences of Liquidations.

If promoters enter into an out of court settlement even the operational and other creditors can hope to recover a bit of their dues, said Chawla.