Siva industries' IBC proceedings: Lenders to appeal against NCLT order

The shareholders of Siva Industries and the Indian lenders are planning to appeal against the NCLT’s Chennai bench order which has rejected the withdrawal of bankruptcy proceedings against the company while setting aside the “commercial wisdom” of the lenders and instead exercising its "judicial wisdom."

The NCLT had said the application made by RCK Vallal, one of the shareholders of the company, is not conforming to the Section 12A of the Insolvency and Bankruptcy Code and sent the company for liquidation. As per the plan accepted by the CoC, Indian lenders, led by IDBI Bank, are going home with recovery of only 6 percent of their dues.

The lenders plan to move the NCLAT as NCLT slammed the banks repeatedly for not voting on the one time settlement proposal made by the promoters and clearing the proposal which, as per the NCLT, does not conform to the IBC Code. At the same time, Vallal is likely to rely on previous NCLAT judgements where similar petitions like his were accepted by the tribunal and a NCLT order was stayed.

Legal experts said in the previous judgments, the Supreme Court had held that the commercial wisdom of the CoC in approving a resolution plan under the IBC should be based on the principle that the commercial matters should not become subject to judicial interference. “Whether there should be a framework for such commercial decision making by the creditors is a subject matter of another discussion. But in the case of Siva Industries is not in relation to an approval of a resolution plan under IBC but a withdrawal from the insolvency process based on a proposed settlement,” Ajay Shaw, Partner, DSK Legal, said.

As regards, withdrawal from the insolvency process is concerned Section 12A of the IBC read with Regulation 30A of the CIRP Regulations provides that where an application for withdrawal is made, the lenders have to state the reasons justifying withdrawal. “However, in the Siva Industries matter, the NCLT has questioned the rationale for the withdrawal from the insolvency process as it was of the view that it was more of a business restructuring plan rather than a simpliciter settlement proposal as the pay out to the creditors would happen post the approval within a 6 months’ time frame,” Shaw said.

Further the settlement terms having provisions that enabled further negotiation on the pay-out to creditors did not rightly augur well with the NCLT as there was no finality to the settlement. Another issue that bothered the NCLT was once the withdrawal order was passed, the prayer to enable the creditors to push the corporate debtor into liquidation in case the settlement was not implemented could not be granted as it transcends beyond the scope of IBC, Shaw said.

UAE-based Masdar and IARC currently own 40 per cent of Siva Industries’ Rs 4,864 crore debt and the PSU banks have Rs 3,442 crore exposure.  The voting on the proposal was completed only after approval from respective boards of the banks cleared the proposal to accept Rs 328 crore as one time settlement.

Siva Industries was admitted to the bankruptcy court on July 5, 2019 after an offer from Royal Partners Investment Fund Ltd did not find favours with the banks and was rejected. The resolution professional then filed the liquidation petition before the registry.

But Vallal RCK then filed an application before NCLT, Chennai, on August 31 last year asking the CoC to consider the one-time settlement offer given by the promoter. In October last year, the NCLT directed the resolution professional to convene a meeting of CoC to consider the OTS.  In April this year, the CoC approved the OTS and the resolution professional was authorized by IDBI Bank to file an application under Sec. 12A of the IBC for withdrawal of bankruptcy proceedings.

As per OTS, settlement amount will be paid from the funds/debt to be raised by the promoter either on its own or out of the proceeds from either sale of assets, raising debt or external capital raise using the assets offered as security to lenders.

At the same time, lenders have also agreed to withdraw all pending legal proceedings against Siva group companies as part of the resolution plan.