NCLT examining Siva group-IDBI Bank loan settlement deal, next hearing likely on Friday

The Chennai National Company Law Tribunal (NCLT) has sought some details of the One-time settlement (OTS) deal reached between the IDBI Bank-led bank consortium and Siva Industries and Holdings Ltd (SIHL), promoted by businessman C Sivasankaran, according to two bankers familiar with the development.

"The NCLT has informally sought some details about the agreement reached with the lenders regarding some aspects. They are examining the deal from the legal point of view," said one of the bankers in the know. The banker declined to be named.

While it is not clear what exactly is the clarification sought by the NCLT from the lenders, there has been a debate, of late, on whether former promoters getting back control of their companies through out-of-court settlements will lead to dilution of the true spirit of a law that seeks to keep the old promoters away from bidding for own assets.

SIHL, the holding company of the Siva group, owed around Rs 5,000 crore to lenders. It was dragged to NCLT in July 2019 and with no successful suitors yet, the company was heading to liquidation. In April this year, its promoter C Sivasankaran managed to convince majority of the lenders to withdraw the company from the corporate insolvency resolution process and go in for a one-time settlement of less than Rs 500 crore. In effect, banks sacrificed 90 percent of their outstanding loans—about Rs 4,500 crore—to SIHCL.

The lenders have invoked Section 12 A of IBC Act to withdraw the case from the IBC court and reach an out-of-court agreement with Sivasankaran.

Section 12 A of the IBC allows insolvency cases to be withdrawn with the approval of the members of  the committee of creditors (CoC) with 90 percent voting share. In SIHL’s case too, creditors voted in favour of the settlement in the first week of April and National Company Law Tribunal (NCLT) approval is awaited, IDBI Bank, the lead lender said on Twitter.

"The CoC would have approved the settlement offer after duly considering all opportunities of value maximisation as also the liquidation value," said Manmeet Singh, Partner, L&L Partners. "While the haircut is fairly large, the lenders are entitled to accept the offer if this is the best possible outcome for all creditors in the given circumstances," Singh said.

Dilution of Section 29 A?

While there are no obvious rule violations here, such deals could be violating the true intent behind the Section 29 A of the IBC which was introduced to bar wilful corporate defaulters and "connected person" from bidding for stressed assets (including own), which is under CIRP. A recent Supreme Court judgement also made it clear that promoters cannot even participate in the liquidation of a company under IBC.

Such deals indeed indirectly dilutes the true spirit of Section 29 A, legal experts argue. Prem Rajani, Managing Partner of Rajani Associates said: “While this may be good for the honest promoters, on the flip side, this could set a precedent for crony promoters to use the same method, which could very well defeat the purpose of Section 29A,” Rajani told Moneycontrol on May 19. Also, some legal experts warn this could set a precedent for other promoters too to get back the control of the company through backdoors, paying only a fraction of what they originally owe to lenders.

To be sure, from a legal point of view, Sivasankaran is not in direct violation of Section 29. This is because the OTS deal with the promoter happened in the absence of any successful bidders for the company. With no bidders for the company, the lenders had only the option of liquidation which would have yielded even lesser recovery. The OTS deal was accepted after the lenders assessed it as the only remaining viable commercial option.

SIHL’s promoter Sivasankaran is a well- known Chennai-based businessman with investments spanning real estate, hospitality, shipping, minerals and agro exports. At one time, he also controlled companies such as Aircel and Barista, and had a stake in Tamilnad Mercantile Bank. In April, 2018, the Central Bureau of Investigation booked 15 former and serving senior IDBI Bank officials and 24 others, including Aircel founder C. Sivasankaran, 11 companies and their directors for allegedly cheating the bank to the tune of Rs 600 crore.

Allegation by Royal Partners

What has also added fuel to the controversy is the allegation by Royal Partners, a bidder for SIHL, that IDBI had derailed the sale of Siva Industries by vetoing its bid despite not having the requisite voting share in the consortium. But according to one of the banker quoted above, Royal Partners' bid was smaller than than OTS offered by Sivasankaran. "It didn't make sense for us. The offer was too less for us to give a serious consideration," said the banker.

An email sent to Royal Partners on this issue didn’t elicit any response till the time of filing this story. SIHL could not be reached for comments.

"Siva Industries Holdings Ltd (SIHL) was referred to NCLT by the lenders in July 2019. There was no successful resolution applicant. The promoter/shareholder made an OTS offer, which was higher than the liquidation value. Creditors voted in favour of the settlement in the 1st week of April 2021. NCLT approval is yet to come. Recovery for the bank through OTS vis-à-vis recovery NCLT liquidation based on valuation of assets available as security. This OTS and exit from NCLT does not prejudice the CBI complaint. The case with CBI continues," IDBI Tweeted on 14 May.

The NCLT's decision on the C Sivasankaran-SIHL case is critical for future IBC cases. "If NCLT clears the deal, it could prompt many other promoters too to take the similar route to regain control of their assets by paying a small amount to lenders if bidders are absent. While commercially, the decision make sense to banks, it will lead to manipulation of NCLT system itself. OTs deals used to happen anyway even before IBC," said a senior banker who is not involved in this deal. He too declined to be named.