The NCLT will adjudicate the settlement between promoters of Siva Industries and IDBI Bank-led financial creditors.(Reuters)
The NCLT will adjudicate the settlement between promoters of Siva Industries and IDBI Bank-led financial creditors.(Reuters)

Govt may review laws related to withdrawal of IBC cases

In April, 2021, IDBI Bank-led lenders discussed and approved an OTS proposal of Siva Industries where creditors agreed to take 93.4% haircut to settle 4,863 crore dues, the officials with direct knowledge of the matter said requesting anonymity.
By Rajeev Jayaswal, Hindustan Times, New Delhi
UPDATED ON JUN 25, 2021 09:13 AM IST

The government may review the legal provision that allows for the withdrawal of an insolvency case in favour of an often-negligible one-time settlement (OTS), two officials said, citing the example of Siva Industries Holdings Ltd.

In April, IDBI Bank-led lenders discussed and approved an OTS proposal of Siva Industries where creditors agreed to take a 93.4% haircut to settle dues of 4,863 crore, the officials with direct knowledge of the matter said requesting anonymity.

Subsequently a withdrawal application was filed under Section 12A of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT), Chennai on 8 April.

That means the banks recovered 318 crore, including an upfront payment of 5 crore. The Chennai bench of NCLT is scheduled to adjudicate on the out-of-court settlement on Friday.

According to a Mint report on 18 June, India’s bankruptcy resolution system remains marred by meagre recoveries and protracted delays despite attempts to fine-tune the regime that debuted in 2017. On 15 June, NCLT questioned the extensive haircut (95.85%) that lenders have agreed to take in the insolvency resolution of Videocon group companies.

According to data from the Insolvency and Bankruptcy Board of India (IBBI), in over 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80%.

“We cannot comment on a particular case at the NCLT. But government agencies and regulators watch all such developments. If required, laws can be amended to plug loopholes and strengthen the IBC,” said one of the officials cited above.

The ministries of corporate affairs and finance, the department of financial services, IBBI, the Reserve Bank of India, IDBI Bank, Life Insurance Corporation of India, which has a controlling stake in IDBI Bank, and the resolution professional of Siva Industries and Holdings did not respond to email queries.

Section 12A was added by an amendment of IBC in 2018, which allows the parties to close an insolvency case with approval of 90% of the committee of creditors (CoC). “It seems that this exit route is being misused in some cases. The matter is under examination and based on facts appropriate decisions will be taken,” the second official added.

Nakul Sachdeva, partner at law firm L&L Partners said while drafting the IBC, legislators incorporated ‘Section 29A’ to exclude participation of defaulting promoters in the resolution process. The same intent was thereafter also carried forward to the liquidation process wherein a party barred under 29A was barred from giving a scheme under the Companies Act during the liquidation process.

“However in 2018 Insolvency the Law Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post-admission of a resolution process if the CoC approves of such action by a voting share of ninety percent; as no such provision was present in the code. Accordingly section 12 A was incorporated in the code,” he said.

Sachdeva said the adjudicating authority (AA) is not obligated to allow every application for withdrawal under Section 12A as the terminology used in the section is “may” accordingly the section itself provides power to the AA to reject the withdrawal application.

On the Siva Industries case, he said: “Till the time the NCLT is reviewing the application under 12A, it would not be appropriate for the government to take up the matter.”

Commenting on cases where lenders have taken substantial haircuts, Anoop Rawat, Partner Insolvency and Bankruptcy at law firm Shardul Amarchand Mangaldas & Co said, “It would be important to know the current value of the company and whether there is any definitive finding that value loss is attributable to the promoters. Whether the transaction sets a bad precedent or not would depend on this analysis.”

“We cannot generalise the transactions. The reason for value erosion (economic, diversion etc.) need to be known before any decision for reversal is undertaken. Also, what are the consequences of liquidation and the potential recovery for lenders in that scenario should also be analysed,” he added.

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