Illustration by Binay Sinha
The commercial decision of banks and lenders, which are collectively termed committee of creditors (CoC) under the Insolvency and Bankruptcy Code
(IBC), has always been a bone of contention for corporate debtors and resolution applicants, as well as adjudicating authorities. Two such decisions taken by banks over the past few months, however, could be a glimmer of hope for errant promoters, experts said.
In the case of debt-laden Sterling Biotech, the CoC — led by Andhra Bank
— had accepted a debt-repayment plan submitted by a person claiming to be related to the promoters, Chetan Sandesara and Nitin Sandesara. Andhra Bank, with approval of 90 per cent of the lenders, then moved the National Company Law Tribunal (NCLT) seeking to withdraw insolvency proceedings against the company under Section 12 (A) of the IBC.
The NCLT, however, rejected the plan on grounds that it was not comfortable with the source of funds.
“The factors which the NCLT, Mumbai, had looked at while rejecting the withdrawal application were sound and logical. The language contained in Section 12 (A) is that the NCLT
‘may’ approve the withdrawal. While under Section 30, the NCLT
‘shall’ respect the commercial decision of the CoC (in approving a resolution plan), in this matter, the NCLT
has discretion,” said Suharsh Sinha, partner at AZB Partners.
The National Company Law Appellate Tribunal (NCLAT) later overturned the NCLT’s decision and allowed the promoters to take back control of Sterling Biotech, provided the funds they would use to repay the banks came from a clean source and were not the proceeds of some crime.
In a similar case, the lenders are in talks to take an offer from the erstwhile promoters of the 1,200-Mw Mahan Power project in Madhya Pradesh, the Ruias of Essar Group, after having rejected an offer from the ArcelorMittal
group, which failed to meet expectations of the lenders.
The CoC took this decision despite L N Mittal-owned ArcelorMittal’s non-binding bid of Rs 4,800 crore being higher than the Ruias’ offer of an upfront cash payment of Rs 3,450 crore as a one-time settlement.
While some experts believe that these decisions by the lenders are based purely on their commercial wisdom and follow a path which will lead to maximum recovery for them, others say that this could mark a shift in the attitude of CoCs.
“They take whatever is coming. What if the liquidation value is even lower? What if there is no resolution applicant? Who is going to run this (the company)?” said Vidisha Krishan, partner at MV Kini & Co. These decisions by the CoC could also offer a glimmer of hope for errant promoters who had been pushed out of their company’s management due to provisions of the IBC.
“I think the logic is to be as commercial and as practical as possible. If you are not getting bids or if
there is no prospect of getting a bid, there is no harm in entering into a settlement agreement with the promoter. It is better to hand it back to the promoter than to liquidate it,” said Sinha.
The whole idea remains that the company should be kept as a going concern, and if anything helps that cause, it should be encouraged, said Saurav Kumar, partner at IndusLaw.
Despite all these decisions, the lenders will, however, still have to ensure that the funds for debt repayment and settlement come from legitimate sources, the experts said. “It may not stand the test and would not be able to really translate into application. How does a bank verify that the source of fund is not from proceeds of crime?” said Krishnan.
Banks are extra-cautious about following the due process of law, and ultimately they are all businesses, Kumar said. “If they are getting money back with a huge haircut versus if they see an opportunity where they can get more money, their business acumen will tell them to go towards more money by following due process of law.”
The promoters could probably reach an agreement with the lenders to ensure that the company remains with them. There is no bar against the idea of settlement, though it does go against the spirit of the IBC
that errant promoters should not be allowed to run the company again, said Krishnan.