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Banking Central | Is Section 29A being abused, hobbling IBC?

Recent developments show promoters still have the option to make a claim for their companies admitted under IBC. Doesn't that weaken the spirit of the law that intends to keep former promoters away from the bidding process?

May 24, 2021 / 12:20 PM IST

When finance minister Arun Jaitley in 2016 launched the Insolvency and Bankruptcy Code (IBC), the idea was to bring in a system to address the problem of endless delays in the corporate debt resolution process through management take over or liquidation. Over the next four years, the IBC system brought in some major changes in the way large corporate cases were approached.

Under IBC, creditors take over assets as against the earlier practice of debtors keeping them till the resolution or liquidation. The shift in favour of creditors results in a speedier and unbiased resolution process and helps in improving the credit repayment culture, say experts.

There have been some big-ticket NPA (non-performing assets) resolutions. Banks have already managed to recover around 40 percent of their dues in 12 large cases, 10 of which had reached the resolution stage till March 2021.

An amendment—Section 29 A— was introduced to IBC in 2017 to check attempts by the recalcitrant promoters of insolvent companies to regain control of the company by forcing creditors to take massive haircuts.

Some recent developments, however, show that the IBC process has some loopholes that former promoters can abuse to gain control of the company, defeating the purpose of Section 29A.

Close

The IDBI Bank-C Sivasankaran loan settlement is a case in point. A consortium of banks led by IDBI Bank took Siva Industries and Holdings Ltd (SIHL) to IBC court in July 2019. With no successful applicants for the company, the lenders ultimately accepted a one-time settlement (OTS) with the bankers. So, against a loan of Rs 5,000 crore, Sivasankaran, who is the Aircel founder, paid only around Rs 500 crore to banks.

For banks, it was the best option available. They have provided for the entire loan amount and whatever is recovered can be shown as write back from provisions but the fact is Rs 4,500 crore lent to SIHL is gone for good.

Banks deal with public money, they are capitalised (in the case of PSBs) using taxpayer funds and hence one can’t simply ignore this loss as a failed business transaction.

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This one-time settlement has divided experts. A section of them argues that banks are smart to take whatever they get—they wouldn’t have got anything if the company had gone in for liquidation that involves selling of asset in part or full. Lenders typically get very little money from the process.

The other view is that such settlements weaken the spirit of the IBC code, especially Section 29A that bars promoters from bidding for their assets in a bankruptcy court. The Sivasankaran case could set a bad precedent for influential and powerful promoters by making sure there are no bidders for the company and then strike a one-time settlement deal.

According to Prem Rajani, managing partner at law firm Rajani Associates, the IDBI-Sivasankaran deal is a significant digression or dilution of IBC, judicial pronouncements, the amendments in the last four years, though this may make commercial sense for banks.

Another test

The bankruptcy code faces another and perhaps bigger challenge.  The Kapil Wadhawan-Dewan Housing Finance Ltd (DHFL) case is different from the above case as the promoter has offered to pay back the creditors in full.

Wadhawan, a former promoter of DHFL, challenged the committee of creditors’ decision to choose the Piramal Group as a winner in the bidding process and moved a petition asking the CoC to consider his settlement offer.

The National Company Law Tribunal (NCLT) has allowed his request and has asked the lenders to consider the offer but, there are questions here as well. If the promoter has enough money to pay up, why didn't he do it earlier? How did DHFL end up in a mess?

Lenders do not seem to trust Wadhawan's offer, which is why they haven’t considered the settlement request so far. What's the point of asking the lenders again to look at the proposal? In this case, the lenders, it is learned, are likely to challenge the NCLT order in the National Company Law Appellate Tribunal (NCLAT). Wadhawan is an accused in the Yes Bank loan bribery case.

What is common to both cases is the promoters' bid to regain control of the companies. It has already happened in the IDBI-SIHL case. Isn’t this undermining the spirit of Section 29A of IBC, which says an insolvent, a wilful defaulter, or a person who was a promoter or was in the management of the corporate debtor, would not be allowed to bid for the insolvent company concerned?

Of course, it is a matter of legal interpretation but the very idea of Section 29A, one can argue, is being diluted. That’s a point warranting a serious debate.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
Dinesh Unnikrishnan
first published: May 24, 2021 12:20 pm

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