SC allows banks to go ahead with Siva Industries settlement offer

Says tribunals can't interfere with banks' commercial wisdom; promoter's offer of Rs 328 cr was okayed by CoC

The Supreme Court on Friday allowed banks to proceed with an offer of settlement submitted by the promoter of Siva Industries under Section 12A of the Insolvency and Bankruptcy Code (IBC), which allows such a provision if 90 per cent of the committee of creditors (CoC) agree to it.

The Supreme Court reiterated it had made it clear earlier that Section 12A passed constitutional muster, and it had held the commercial wisdom of the CoC should not face judicial intervention.

“It has been held that there is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts,” the court said.

The court said when 90 per cent or more of the creditors found it would be in the interests of the stakeholders to permit a settlement and withdraw the bankruptcy process, the adjudicating or the appellate authority could not sit in an appeal on this.

In the Siva Industries case, the CoC cleared the settlement plan of promoter Vallal RCK, father of serial entrepreneur C Sivasankaran, with 94.2 per cent of the vote.

“It will set a precedent for IBC matters because it has paved the way for lenders to take commercial decisions without fear of judicial intervention. But since this gives more powers to creditors, the IBC regime should have a proper Code of Conduct for creditors and a separate one for public sector banks,” a former official of the Insolvency and Bankruptcy Board of India (IBBI) told Business Standard.

The IBBI had last year prepared a draft code of conduct for creditors and it has not yet received the green signal.

The order cited the Insolvency Law Committee Report, which reviewed the functioning and implementation of the IBC.

The official said the court had taken a strictly legal position because the matter concerned private money and not public money.

“Settlement is always a better option than liquidating the company if all parties involved agree to it and in any case liquidation could fetch much less. In many cases, chances of recovery are nil despite having huge exposure,” he added.

Legal experts are of the view that though 12A cases were earlier cleared by lenders, the Siva case was litigated because the offer was considered too low by the National Company Law Tribunal (NCLT) and was rejected even though the CoC had cleared it. The court said neither the NCLT nor the National Company Law Appellate Tribunal was justified in not giving due consideration to the commercial wisdom of the CoC.

Vallal RCK, 94, said the company would be under a new management and focus on settling the matter with its creditors as soon as possible so that a new chapter can begin for the company.

Siva Industries was admitted to bankruptcy court on July 5, 2019. An offer from Royal Partners Investment Fund was rejected because it was too little.

The resolution professional then filed a liquidation petition before the NCLT registry. But Vallal filed an application before the NCLT, Chennai, on August 31, 2020, asking the CoC to consider his one-time settlement offer.

In October 2020, the NCLT directed the resolution professional to convene the CoC and consider the settlement offer.

Vallal’s offer of Rs 328 crore, which would entail a 93 per cent haircut for the lenders, was approved by the CoC and the lenders filed a petition with the NCLT to withdraw the bankruptcy proceedings.

But the NCLT rejected the settlement offer in August 2021, leading to Vallal moving the NCLAT.

In January this year the NCLAT upheld the NCLT order for liquidation. Vallal then moved the Supreme Court, which stayed the NCLAT order of liquidation in March this year.

“The judgment reinforces the principle that the commercial wisdom of the committee of creditors is sacrosanct and if 90 per cent of the creditors decide that a withdrawal of corporate insolvency resolution proceedings against a corporate debtor should be allowed then it should be given effect,” said Ajay Shaw, partner, DSK Legal, a corporate law firm.

According to the IBBI, 17 per cent of the IBC cases filed till March this year have been resolved.

THE STORY SO FAR

•    July 2019: Lenders begin bankruptcy proceedings against Siva Industries after it defaults on Rs 5,000-crore debt

•    August 2020: Promoter Vallal RCK asks NCLT to direct banks to consider settlement offer

•    August 2021: NCLT orders liquidation; rejects promoter's settlement offer entailing 93% haircut

•    January 2022: NCLAT upholds NCLT judgment; orders liquidation

•    March 2022: SC stays NCLAT order after Vallal moves court

•    June 3, 2022: SC allows settlement offer