New Delhi: Sterling Biotech of Nitin and Chetan Sandesara, brothers accused of bank fraud and money laundering, is set to come back to the family after bankruptcy proceedings against the firm were ended following an understanding with creditors.
The development follows an order of the National Company Law Appellate Tribunal (NCLAT), the body for appeals on corporate disputes overseen by the National Company Law Tribunal (NCLT), delivered last month.
In allowing the family to regain control of the company, the NCLAT kicked off a debate on the Insolvency & Bankruptcy Code (IBC), the milestone law that allows creditors to initiate insolvency proceedings against corporate debtors.
Under the legislation, “defaulting” promoters were to be kept from regaining control of the entity, with “Section 29A” added to the IBC last year expressly for this purpose.
But according to experts, the Sandesara order seems to suggest a loosening of the definition, leaving an opening for defaulting promoters to get their companies back but also throwing open several questions.
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What happened
The brothers, who have fled India, face an Enforcement Directorate (ED) probe for alleged money laundering and a CBI investigation.
The Sandesaras-owned Sterling Group is accused of defaulting on and diverting loans to the tune of Rs 15,000 crore taken from several lenders — making their dues much higher than those of another high-profile fugitive, the diamantaire Nirav Modi.
Of this, a sum of over Rs 9,000 crore is owed by Sterling Biotech, a group company, to a consortium led by Andhra Bank.
Andhra Bank had initiated insolvency proceedings against Sterling Biotech in June last year.
When the Sandesaras first proposed a settlement, it was rejected by the committee of creditors (CoC) set up under the adjudication process in the NCLT.
The Sandesaras subsequently offered a revised settlement, which was approved by over 90 per cent of the voting share of Andhra Bank-led committee of creditors (CoC).
This entailed a one-time settlement of Rs 3,279 crore against a total claim of Rs 9,053 crore, at a 64 per cent haircut for lenders, with the Sandesaras pledging money from their Nigeria-based assets and touting investors who had expressed interest in bailing them out.
A lawyer representing the Andhra Bank-led consortium has been quoted as saying that the settlement was aimed at ensuring maximum recovery since the company’s liquidation value was less than Rs 300 crore.
The NCLT, however, rejected the settlement, questioning the source of funds, and called for liquidation.
It stated that Section 12A of the code, which says the NCLT “may” allow withdrawal of insolvency proceedings filed under the IBC after the proposal has been approved by 90 per cent of the committee of creditors, could not undermine Section 29A.
It was of the view that it could not allow a contract where one party is an absconder, and challenged the “commercial wisdom” of the CoC in having accepted the settlement offer.
However, the NCLAT overturned the order, saying the two sections were exclusive of each other. It also ruled that once an application is filed under Section 12A after the CoC’s approval, it was not open for the NCLT or the NCLAT to reject it. To quell the NCLT’s concern about the source of funds, it said the ED would verify it.
The NCLAT also left it open for the ED, the CBI, the Ministry of Corporate Affairs, the Securities and Exchange Board of India (SEBI) and other authorities to continue their proceedings against the promoters.
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Backdoor entry for defaulting promoters
The entire process throws up several legal questions, including whether the NCLT has any power once a withdrawal application is filed.
According to Delhi-based advocate Deepak Joshi, “The NLCAT decision has taken away the discretion which the law permits for the NCLT to reject an application under Section 12A, without any discussion on this aspect.”
The objective of adding Section 29A was to bar the possibility of defaulting promoters getting a backdoor entry by submitting a resolution plan and acquiring assets of their companies at significantly discounted prices.
“A 64 per cent haircut in a 12A application is unheard of… One of the primary reasons behind inserting Section 29A was also that willful defaults or the promoters who were responsible for dragging their own companies to the ground should not be allowed to regain control unless they wash away their sins,” Joshi said.
“The control of the company is not a divine right. Section 12A cannot be used to evade the mandate of Section 29A and the legislative intent behind the enactment of the IBC,” added Supreme Court advocate Vishal Gehrana.
“There are companies that are paying off their liabilities to be able to stand in queue. Thus, we need to keep an eye out for cases where somebody wants to regain control of a defaulting company by escaping the checks and procedure others are subjected to,” he added. “The idea is to prevent the reentry of promoters who contributed in turning a fit company into a defaulting one.
“The debt given out of public money should not become an interest-free loan for defaulting promoters,” he said.
However, Delhi-based independent legal practitioner Vishakha Gupta defended the NCLAT judgment as “legally sound”.
“It is in line with precedents, that an application under Section 12A is an option to the management of the corporate debtor to escape the clutches of the insolvency resolution process,” she said.
However, she added that the judgment, though legally tenable, “makes us wonder about the ripples it will cause in the investigations being conducted by the ED, CBI, SEBI etc”.
“The absconding management of Sterling… has been allowed to go forward with its proposal, which, as observed by the NCLT, contains no semblance of authorisation from the CD (corporate debtor, the company). It is yet to be seen if this legally sound protection awarded to the non-traceable management of wilful defaulters/non-performing assets will allow them to evade the investigations and their consequences thereof, and also allow them to continue incurring new loans,” she added.
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Under no circumstances should a promoter who company has gone under IBC should be allowed to bid for it. It will otherwise set up a moral hazard issue.
Is it considered in india that all promoters who are in default are criminals? Or have committed “sins“?
I have been following India’s bankruptcy law, which is a great step forward in finding solutions to its debt problems, but regardless of the above case, the general assumptions are based on promoters misfortunes and finding ways to punish them.
World over promoters default, however in india alone is the law made to keep them out in spite many businesses defaulting due to business environment and policies.
Lenders & COC must have right to get best possible recovery for their dues. If after several attempts no other competitive offer is available then why to sacrifice recoverable public money and scrap the plant for vultures in liquidation process.
Other criminal acts should be dealt independently
Very well connected folk. Much smaller than the Bellary brothers. One would be surprised if anything comes out of the probes.
Don’t know about these guys but if someone is willing to pay thousands of crores for an asset worth only hundreds of crores then it makes sense to at least get that money. The inquiry into his dealings can be continued by ED etc, and if found guilty of fraud you can send the guy to prison. Ownership of the asset should be treated as a financial decision while any untoward monetary dealings should be dealt with as a crime separately. I have no problem with some promoter regaining his company but also spending some time in jail for the frauds he had done earlier.