You may like him or you may hate him. It doesn’t bother him the least. Yet, serial entrepreneur C Sivasankaran never ceases to make news.
Siva Industries Holdings Ltd, a company founded by him, has been in the headlines of late. Well, the lenders have decided to drop bankruptcy proceedings against Siva Industries by accepting the one-time-settlement offer made by the company.
This has now become a subject matter of intense debate. The issue has since gone before the National Company Law Tribunal (NCLT), which has reserved its order.
A little bit of number crunching will reveal the corporate debt resolution process in the country ever since the advent of Insolvency and Bankruptcy Code (IBC). Up to March, 2021, there were about 4,376 cases under the IBC. Half of these have been closed. The rest are undergoing resolution.
The IBC Record
Nearly 50 percent of the 2,653 cases closed by lenders under IBC in fiscal 2021 have ended in liquidation while only 13 per cent were resolved, according to the quarterly bulletin of the IBC. About 23 percent of the closed cases are either under review or under appeal.
In 16 percent of cases, the companies were handed back to the promoters after they cleared part of their dues under Section 12A of the Insolvency Act. Fifty one percent of all admitted cases were initiated by operational creditors.
In the resolved cases, the haircut, or the loss to banks on their claims, rose to 60 percent in fiscal 2021, from 55 percent average in the previous years. In the March 2021 quarter alone, haircut rose to a whopping 74 percent of the claims made by the lenders against the defaulters.
About 79 percent of the ongoing cases until March this year have already passed 270 days since admission. It is generally agreed that delay in the resolution process erodes the value of assets, increasing the prospects for liquidation.
The spirit of IBC lies in the resolution of corporate debt and not in liquidation per se of the debt-ridden defaulting company. In the Insolvency and Bankruptcy Code 2016 (IBC), there had been no provision for the withdrawal of an application filed before the NCLT except as provided for in Rule 8 of the Insolvency and Bankruptcy (Application to the NCLT) Rules of 2016.
Enter Section 12A
Under this rule, NCLT could permit the withdrawal of the application on a request by the applicant prior to its admission. A report of the Insolvency Law Committee, too, recommended amendment of Rule 8 to allow withdrawal after the admission of CIRP (corporate insolvency resolution process). Section 12A was inserted subsequently through an amendment Ordinance dated June 6, 2018.
This gives the adjudicating authority power to allow withdrawal of an application by CIRP applicant with 90 percent voting share approval of CoC (committee of creditor) in such a manner as “prescribed”. Section 12A requires a much larger voting share approval (90 percent) unlike the resolution plan which needs 66.67 percent voting share approval by CoC.
There is a rider, though. The 12A settlement doesn’t fully absolve the promoters of their responsibilities vis-a-vis their past actions.
In a resolution plan, resolution applicants (Section 29A of the IBC bars promoters from acting as resolution applicants) get a far greater shield for the past decisions or actions of the company under CIRP.
The idea of 12 A is to give a chance to the company to exist. When the law allows it, you don’t expect the promoters to let go the opportunity to retain control over their companies. But questions can still arise.
Plenty of questions
How justified are the lenders in accepting OTS under 12A? Is the haircut they take just? How much is just a haircut? Predictably, the debate in this instance, too, revolved around these aspects. Courts have opined on many occasions that the commercial wisdom of CoC cannot be doubted.
In a liquidation process, unsecured creditors usually don’t get anything. The secured creditors, on the other hand, get the best (albeit delayed) recovery. When it comes to the question of who gets the right to vote, however, the IBC does not differentiate between secured or unsecured creditors.
As long as you meet the criteria of a “financial creditor” as defined by IBC, you get a seat in the CoC, and the CoC’s vote is what seals the fate of the company under CIRP. This creates interesting possibilities wherein even an unsecured creditor with a relatively small vote share could block or sway the final outcome for a company under CIRP.
In the Andhra Bank vs Sterling Biotech case, the National Company Law Appellate Tribunal (NCLAT) allowed the withdrawal of insolvency application and allowed for the settlement with the creditors though NCLT (National Company Law Tribunal) had earlier raised concerns over the status of the promoter sources of funds.
In the Sterling Biotech case, questions were raised over the misuse of 12A. One argument then was that Section 29A was inserted in IBC to block errant and wilful defaulters from buying back assets.
Has 12A opened up Pandora's box? Or has it proved to be a much-needed stop-loss toll for lenders?
By staying in the past, you freeze yourself in the present. Perhaps, lenders see 12A as a route to move forward.
Technically speaking, Sivasankaran is a nobody in Siva Industries at this moment. If the company founded by him could get a chance to live another day, he would be immensely pleased.
All eyes are on the impending NCLT order.