Lenders plan to appeal against Sterling Biotech liquidation order

Banks are planning to appeal against the National Company Law Tribunal’s (NCLT's) liquidation order of last week for Sterling Biotech.

The decision, to go to the National Company Law Appellate Tribunal (NCLAT), was taken by the Committee of Creditors (CoC). Their reasoning is that liquidation will mean in a bigger loss than they’d previously agreed to bear. 

Earlier, they’d agreed to accept a one-time settlement (OTS) offer worth Rs 3,110 crore from the firm’s now-absconding promoters. However, the NCLT rejected this offer last Wednesday.

This came after diverse stands taken by the official agencies. The Union ministry of corporate affairs was for rejecting the offer. The markets regulator Securities and Exchange Board of India (Sebi) said it planned to take action against the company. The Reserve Bank of India (RBI) did not offer any view. The company also faces action by the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI), on a charge of bank fraud; the ED had got its assets attached. 

The absconding promoters, the Sandesara brothers, made the OTS offer in August last year. It would have entailed the banks taking a 65 per cent ‘haircut’ on their Rs 9,000 crore of dues. A haircut is the loss a bank takes in its books to resolve a defaulting account. 

The NCLT order says RBI’s representation on the OTS simply refers to a circular it had issued to banks on July 28, 2015, on ‘Compromise on non-performing assets’. This has guidelines on how a bank may enter into such a settlement and asks that a distinction be made between a willful defaulter and a borrower, which has defaulted due to circumstances beyond their control. 

Also, RBI had said, any settlement must comply with the KYC guidelines under the anti-money laundering rules and the provisions of the Prevention of the Money Laundering Act (PMLA) 2002. 

“However, RBI has not submitted its stand but only apprised us regarding its circular in this respect. Its response is of no consequence,” goes the NCLT order.

The ED, on the other hand, had said the promoters were under investigation and it had asked the PMLA court in Delhi to declare them economic offenders under the Fugitive Economic Offender Act of 2018. The ED said the main object of the PMLA and the Insolvency of Bankruptcy Code (IBC) of 2016 were different from each other. The IBC did not deal with the proceeds of a crime. “Thus, the civil law cannot be given precedence over criminal law such as PMLA 2002 and cannot override the criminal law at any stretch of imagination,” the NCLT order, quoting the ED, said.

The NCLT said the promoters are ineligible to bid for the insolvent company, under Section 29A of the IBC, enacted to ensure willful defaulters do not regain control of a company.

Besides, it said, the promoters had not disclosed their source of funds to the Resolution Professional. When asked, the banks had said they’d deal with the Tribunal directly on this. However, said the tribunal, it was clear that the promoters were to initially make part-payment by March 2019 and then orally asked for more time until June.  “The stand taken by the Union of India is commendable. Despite that, the CoC has arbitrarily approved the resolution plan under the guise of an OTS...without even verifying the source of funds,” the NCLT said, and rejected the banks' plea. Adding: “Such an act of the CoC can never be treated as one of commercial wisdom.”