Siva Industries Case: Do CoC’s need a Code of Conduct?
The Insolvency and Bankruptcy Code, 2016 (‘IBC’) was introduced in order to ease the procedures relating to insolvency that were considered to be cumbersome. Earlier, the debtors’ inability to repay their lender contributed to increase in the number of non-performing assets (‘NPAs’). However, all attempts of improving the insolvency regime had failed.
This series of failures had led to the advent of the IBC. This Code seemed to be the one-stop solution for dealing with all matters pertaining to insolvency. It catered to the needs of the investors by shortening the inordinately long and cumbersome process of insolvency. With the introduction of this Code, a spike in the number of investments was observed as it had promised to make the business regime for small investors easier than ever. The IBC’s insolvency procedure came with crystallized timelines within which the insolvency process was to be carried out. During times of insolvency or bankruptcy, the Corporate Insolvency Resolution Process (‘CIRP’) not only helps the investors to recuperate their investments from the debtor but also gives the debtor a chance to revive their business.
Since its inception, the IBC has already witnessed four major amendments. For instance, through the Insolvency and Bankruptcy Code (Amendment) Act, 2019, a 330-day timeline is fixed for completion of CIRP process. By adhering to strict timelines, the Code attempts to avoid value erosion of the corporate debtors’ assets so that the creditors can realize their maximum amount and, at the same time, revival of the corporate debtor becomes feasible. However, despite such attempts, the Code now seems to be crippling due to prolonged delays and excessive haircuts that the lenders are accepting. Amid all of this, the major concern revolves around the Committee of Creditors (‘CoC’). Of late, the CoC’s conduct has been contentious and questions have been posed against it. In the recent case of Siva Industries, the NCLT dissented from the decision of the CoC’s for one-time settlement (‘OTS’). This dictum by the Adjudicating Authority has posed serious question on the commercial wisdom of CoC’s. This particular piece delves into the verdict and critically analyses the legality of the same.
In this particular matter, the CoC, led by IDBI Bank, had filed an application under Section 12A of the IBC before the Chennai bench of the National Company Law Tribunal (‘NCLT’) for withdrawal of the insolvency proceedings against Siva Industries (in this case, the corporate debtor). Here, Siva Industries owed a debt of Rs. 4863 crores to the CoC.
Furthermore, the lead lender, IDBI Bank, had agreed to settle the dispute with an OTS amount of Rs. 363 crores, with the reason being the absence of any competent resolution applicant.
The NCLT bench heavily reprimanded IDBI Bank for its decision to settle the dispute with an OTS amount. Furthermore, it posed a question to the lead bank about the real intent behind accepting a haircut as high as 93.4 per cent. It further stated that the settlement looks more like a restructuring deal. The bench was bewildered to observe that the particular OTS deal was even less than the liquidation value of the company. And based on the above points, the Court rejected the plea of the lender for a one-time settlement.
If one is to peruse the above facts and judgment, it might seem like the Tribunal was erroneous in its decision to reject the plea. However, we must analyse every nook and corner of the judgement.
This dictum by NCLT created a lot of clamors around the law fraternity. Firstly, the authority of the Tribunal to question CoC’s wisdom was contentious in this particular matter. It’s an established fact, as has been reaffirmed by multiple verdicts of the apex court, that the CoC’s wisdom is unquestionable. In the matter of K. Sashidhar v. Indian Overseas Bank, it was delineated that under IBC there is no ground to challenge the wisdom of CoC, and under no circumstance can NCLT/NCLAT question the decision of the CoC with regards to acceptance and rejection of the resolution plan.
Subsequently, the Bankruptcy Law Review asserted in its Report that the prima facie objective of the IBC is to rehabilitate the corporate debtor. Therefore, it can be concluded that in the aforementioned case, the CoC’s were rightfully exercising their unfettered wisdom to primarily revive the corporate debtor (as per the objective of the Code) and allow it to exit with whatever sum of money that it could recover out of the settlement.
On the contrary, if one delves into the language used in Section 12A of IBC, it clearly reads that the Adjudicating Authority “may” approve the withdrawal application. Therefore, the Adjudicating Authority was exercising its rightful jurisdiction while rejecting the plea. The same has been affirmed in the matter of Jai Kishan Gupta v. Green Edge Buildtech LLP and Ors. wherein the Supreme Court had delineated that the Adjudicating Authority has the sole discretion to approve or disapprove a withdrawal application. It further stated that the Adjudicating Authority will only come to a decision after considering all the relevant factors in a particular scenario.
Again, Section 29A was introduced with an intention to bar defaulting promoters from suggesting a scheme in the resolution process. However, it is pertinent to note that the promoters and founders of the company will not like to lose their hold over the day-to-day affairs of the company and would be inclined to revive it at any cost. Keeping this in mind, the Insolvency Law Committee had unanimously stated that in situations where a corporate debtor and CoC arrive at a common decision with regards to withdrawal of insolvency application, the same would be granted. Subsequently, with an intention to revive corporate debtor, Section 12A of IBC was introduced through the second amendment, which allowed the withdrawal of the insolvency process by consent of 90 per cent voting share of CoC. Furthermore, to aid the objective of Section 12A, it was succinctly stated that restriction for promoters under Section 29A of IBC will not apply in a situation where the withdrawal application is filed under Section 12A of IBC.
However, in light of the abovementioned practice, the author would humbly like to posit a different view. Whenever a withdrawal application under Section 12A is filed before the Adjudicating Authority by the CoC’s, the Adjudicating Authority shall first delve into the fact whether the concerned corporate debtor’s current state of insolvency is directly attributable to its promoters or not. If promoters are found to be directly responsible for the corporate debtor’s state of insolvency, such withdrawal of application shall be cancelled. The author believes that this proposed method can help in increasing the efficiency of the Code.
Apart from the surreptitious conduct of the CoC demonstrated above, there has been a plethora of other instances when the CoC’s conduct has been contentious. Furthermore, it is ruminated that the CoC’s conduct is somehow a prime contributor to the delays in the insolvency process. In a recent parliamentary committee report, it has been explicitly mentioned that “significant discretion” exercised by the CoC’s in accepting late bids in the name of profit maximization vitiates the objective of IBC. It not only creates uncertainty but also discourages genuine bidders from contesting in the process. Furthermore, as per a data released by the Insolvency Bankruptcy Board of India, the average haircut accepted by the lenders since 2017 is 80 per cent which is abysmally high. Therefore, in light of all the above-discussed anomalies in the conduct of CoC, the author suggests the introduction of a separate Act delineating the Code of Conduct for the CoC’s and capping of the amount of haircut that a lender can accept so as to ensure an efficient future for the IBC.
Avik Sarkar is a fourth-year law student at K.L.E. Society's Law College, Bengaluru. His interest areas are M&A, Dispute Resolution and Insolvency laws.