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More promoters move to make aggressive bids to regain control of their bankrupt companies

From the IDBI-Sivasankaran deal to Kapil Wadhawan’s offer for DHFL and Manoj Gaur settlement plan for Jaypee Group, old promoters are offering lenders payment propositions to take back control of their companies. What does this mean for the banking industry?

May 27, 2021 / 10:57 AM IST
According to the Section 29A of IBC, an insolvent, a wilful defaulter or a person who was a promoter or was in the management of the corporate debtor, among other conditions, would not be allowed to bid for the insolvent company concerned.

According to the Section 29A of IBC, an insolvent, a wilful defaulter or a person who was a promoter or was in the management of the corporate debtor, among other conditions, would not be allowed to bid for the insolvent company concerned.

A change of heart, a change of plans or simply working the loopholes?

In recent weeks, there have been at least three back-to-back cases where promoters have made hurried bids to regain control of their companies from ongoing bankruptcy proceedings.

These are IDBI-C Sivasankaran’s one-time settlement (OTS) plan, Kapil Wadhawan’s proposal for Dewan Housing Finance Ltd (DHFL) and Manoj Gaur’s settlement offer for debt-ridden Jaypee Group.

Except in the case of Siva Industries and Holdings Ltd (SIHL) owned by Sivasankaran, the bidding process is at various stages in the other two cases.

While Chennai-based industrialist, C Sivasankaran, made a one-time settlement offer to lenders for SIHL after the firm failed to receive any successful bids in the National Company Law Tribunal (NCLT), Kapil Wadhawan made a bid for DHFL even after lenders had approved a successful resolution effort from Piramal group.

Similarly, Gaur’s offer has come at a time when the government’s construction arm, NBCC, and Mumbai-based Suraksha Group have submitted applications for the firm and voting is due.

Are banks right in considering these offers? Industry experts are divided on the issue.

Let's take the case of DHFL.  Last week, the NCLT asked the committee of creditors (CoC) to consider Kapil Wadhawan’s settlement offer within ten days.

But, the DHFL-administrator, the Piramal group (winning bidder) and the lenders appealed against the NCLT decision earlier this week at the appellate tribunal, which stayed the order of the quasi-judicial body.

Wadhawan owes Rs 91,000 crore to creditors and offered to settle the deal over the next seven to eight years, which the lenders are not keen to consider.

On January 15, creditors to the DHFL voted in favour of Piramal as the winning bidder. Piramal got 94 percent votes. A resolution plan needs a minimum of 66 percent votes to be passed by lenders, who can vote a preference for more than one bidder.

 NCLT order 

At least two experts said NCLT was wrong in directing lenders to consider Wadhawan’s offer.

“In the case of Wadhawan, it is established beyond doubt that they have siphoned off money. I was very surprised when NCLT asked lenders to consider his offer,” says J N Gupta, former executive director at Sebi.

“In the event of a genuine business failure, lenders should give the promoter a chance to settle the dues but if there is a fraud, there is no question of any such settlement,” he adds.

Wadhawan is an accused and is currently being investigated in the Yes Bank-DHFL loan bribery case.

Naresh Malhotra, former SBI executive and senior banking consultant, concurs. He believes NCLT was wrong in allowing Wadhawan’s offer.

“There is nothing concrete in Wadhawan’s offer; the same as in Vijay Mallya’s case with respect to the source of funds and timeframe of payment. My feeling is NCLT is wrong in allowing Wadhawan to go for OTS,” he says.

Vijay Mallya, former Kingfisher chief, defaulted over Rs 9,000 crore to banks and moved to the UK in March 2016.

Since then, the flamboyant liquor tycoon has tweeted about his willingness to settle dues with the banks, but the lenders have not taken these offers seriously, saying there is no clarity on the businessman's payment plan.

In the case of SIHL, in April this year, promoter Sivasankaran managed to convince most of the lenders to pull the company out of the corporate insolvency resolution process and go in for a OTS of Rs 500 crore.

In effect, banks sacrificed 90 percent of their outstanding loans—about Rs 4,500 crore—to SIHCL.

“There was no option left for bankers but to accept the offer,” said a senior official with a Mumbai-based PSU  (public sector undertaking) bank, who was involved in the deal.

He adds: “There were no interests for this company, there were no successful bids. If banks take it to liquidation, they won’t get anything at all.”

Under Section 12 A of the Insolvency and Bankruptcy Code (IBC), if majority lenders agree, banks can withdraw the bankruptcy application. The process requires 90 percent of the voting share of lenders.

Diluting Section 29 A?

While promoters offering settlement deals for IBC companies minus a successful applicant, may make commercial sense to banks, some experts believe that this could violate the true spirit of Section 29 A of the IBC Act.

According to the Section 29A of IBC, an insolvent, a wilful defaulter or a person who was a promoter or was in the management of the corporate debtor, among other conditions, would not be allowed to bid for the insolvent company concerned.

A recent Supreme Court judgement also made it clear that promoters cannot even participate in the liquidation of a company under IBC.

In March this year, while barring the promoters of Gujarat NRE Coke from proposing a revival plan in the event of liquidation under IBC, the apex court said defaulting promoters, barred from a resolution plan under section 29A of the IBC, cannot use the scheme of arrangement and compromise to gain control of a company while it’s in liquidation. “The stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company,” the SC judgment by a Bench comprising Justices Dhananjaya Y Chandrachud and MR Shah, said.

Says Prem Rajani, Managing Partner of Rajani Associates: “This is a significant digression or dilution from the principles of IBC, the judicial pronouncements and amendments in the last four years, although this may make commercial sense to banks.”

Such deals could be unfair towards shareholders as well, points out Sidhharth Purohit, analyst at SMC Global securities in Mumbai.

“If there are good bidders, what is the point of getting back to the old promoters, which will lead to further litigation,” he queries.

According to Purohit, “This will only delay the resolution further as other bidders too will challenge the decision in courts.”

Another senior banker, who declined to be named, points out that lenders always look to get maximum returns from the cases and considering that, an OTS may not be a bad idea.

However, banks need to ensure that no promoters, who are unfit to bid for their own companies, can participate in such deals, he said.

“In many cases, where resolution applicants are not coming forward, banks can use 12 A to withdraw the IBC case and try for a settlement,” the banker said.
Dinesh Unnikrishnan
Tags: #IBC #NCLT
first published: May 26, 2021 07:42 pm