The commercial wisdom of lenders in the corporate debt resolution process has come into sharp focus again following the verdict of the National Company Law Tribunal, Chennai, in the case related to Siva Industries and Holdings Ltd.
The tribunal last week rejected the debt settlement proposal of Siva Industries that was approved by its lenders, known as the committee of creditors, and ordered liquidation of the company.
The proposal was a “business restructuring plan” rather than a settlement envisaged under Section 12 A of the Insolvency and Bankruptcy Code, the tribunal said.
The NCLT also shot down a plea by the lenders led by IDBI Bank to withdraw the insolvency resolution process against Siva Industries, citing ambiguity in the proposal.
The NCLT order is significant because it was pronounced soon after the Parliamentary Standing Committee on Finance submitted a report on “Implementation of Insolvency and Ba Parliamentary Standing nkruptcy Code – Pitfalls and Solutions” to both houses of Parliament on August 3.
According to the Ministry of Corporate Affairs, the ‘commercial wisdom of CoC is supreme.’ In the committee’s view, keeping in mind the experience gathered so far, there is an urgent need to have a professional code of conduct for the CoC, which will define and circumscribe their decisions, as these have larger implications for the efficacy of the Code,” the Parliamentary Committee said in the report.
The panel also suggested that guidelines be formulated for the selection of resolution professionals by the CoC in a more transparent manner.
“During the corporate insolvency resolution process, the CoC decides whether to continue with the interim RP as the resolution professional or to replace the interim RP by another resolution professional without any guidelines,” the report noted. It wanted the Insolvency and Bankruptcy Board of India to frame guidelines for the selection of resolution professionals in a more transparent manner.
“The defaulters’ paradise is no more,” the report said, pointing to the “great success” that the Insolvency and Bankruptcy Code brought about in India’s credit culture.
The NCLT ruling in the Siva Industries case must be read in the background of the Parliamentary Committee report. The verdict appears to echo the apprehensions raised by the panel.
Section 12 A of the IBC allows insolvency cases to be withdrawn with approval from the CoC members with 90% of the voting share. In the case of Siva Industries, promoter C Sivasankaran’s one-time settlement proposal received approval with required vote share of the lenders.
The NCLT observed that the CoC should have approved the promoter’s proposal only if the money would be received in full. Since the CoC failed to do this, the NCLT raised apprehensions. The proposed one-time settlement was for ₹500 crore, which is a tenth of the ₹5,000 crore owed to the banks.
The NCLT order was a surprise, especially since the Supreme Court had reiterated that the commercial wisdom of the CoC was supreme.
The ambiguity in the CoC’s decision, alluded to by the NCLT in the Siva Industries case, was perhaps the situation that the Parliamentary Committee was keen to avoid when it recommended framing a code of conduct for the CoC.
A closer interpretation of the NCLT order makes one wonder if the CoC can be assumed to be infallible in its decision-making. Currently, there appears to be no transparent and well-laid out procedure for decision-making by the CoC, except the 90 percent vote share stipulation to clear a proposal.
Late resolution plans
The report of the Parliamentary Committee also pointed to the “significant discretion’’ enjoyed by CoC in accepting late and unsolicited resolution plans.
“These unsolicited, late bids create tremendous procedural uncertainty. As a result, genuine bidders are discouraged from bidding at the right time,” the panel said.
This weakened the debt resolution exercise and resulted in considerable delays, which eroded value. Recommending an amendment to the IBC, the committee said that “there should be sanctity in deadlines so that value is protected and the process moves smoothly.”
A code of conduct for the CoC could bring about a sense of transparency and avoid ambiguity of the kind alluded to in the Siva Industries case.
Delayed resolution is denied resolution. Caesar’s wife must be above suspicion. If the CoC is supreme, it, too, should be above suspicion. If a code of conduct can help, why not?
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