NCLAT's nod to Sterling Biotech for settlement with lenders baffles experts

A recent order of the National Company Law Appellate Tribunal (NCLAT), allowing the promoters of Sterling Biotech to enter into a one-time settlement with lenders, has surprised Insolvency and Bankruptcy Code (IBC) watchers.

They think this could open up a Pandora’s box for future IBC cases.

Legal experts say the order goes against the legislative intent of the IBC, which has set aside laws to keep errant promoters away from the resolution process. 

Sterling’s promoters Chetan Sandesara and Nitin Sandesara are absconding and face investigations from multiple agencies, including the Central Bureau of Investigation (CBI), the Enforcement Directorate (ED) and the income tax department. The latest NCLAT order could be used as a precedent by promoters, who may have been barred to take part in the resolution process, to take back control of their companies. 

However, the onus also lies with the banks who approve such proposals. “Banks are going with their commercial wisdom in settling with the promoter. Ultimately it is their decision. No promoter can take control till the committee of creditor allows it,” a senior analyst said. “It goes against the ethos of IBC. All promoters will now wait and watch and once they know the bid amount, they will top it up a little and settle with the lenders. All those ousted can come back,” said Diwakar Maheshwari, partner, Khaitan & Company. In its August 28 ruling, the NCLAT allowed liquidation of Sterling Biotech which has total debt of Rs 9,000 crore. 

The appellate tribunal set aside an earlier order of National Company Law Tribunal’s (NCLT’s) Mumbai Bench to allow its promoters to take back control of the company once they make full payment to the lenders. NCLAT’s order has come in response to an appeal by the employees and lenders of the Gujarat-based firm against the NCLT order rejecting the withdrawal of Sterling Biotech’s corporate insolvency application. NCLAT also clarified that “promoters or shareholders or directors have been allowed to pay dues in their individual capacity from their respective account and not from the proceeds of the crime.”

Although Section 29A of the IBC disqualifies promoters and connected entities from bidding for stressed assets, the law does not apply in the case of withdrawal of application.

“This judgment is a huge dilution of 29A as it gives promoters a backdoor entry into their firms. It is against the spirit of the law,” a senior lawyer, who did not wish to be named, said. The aim of Section 29A was to disqualify only those who had contributed to the downfall of the corporate debtor or were unsuitable to run a company because of their antecedents. 

This was the reason Numetal was barred from bidding for Essar Steel. One of the companies of the Essar Group was a part of the consortium that submitted the bid with Numetal.

Arcelor Mittal, too, had to clear its dues with regard to Uttam Galva to get rid of the non-performing asset (NPA) tag and become eligible to bid for Essar Steel. “Section 29A is not applicable if the full amount is paid. The NPA has to be done away with. Money laundering has to be checked. If promoters are willing to take the company, they have to regularise the default,” said Manoj Kumar, partner, Corporate Professionals. 

While withdrawal was allowed only before the expression of interest was received, the Supreme Court waived this condition in some cases. This means a promoter can step in with a settlement offer even after the process is well under way.