Siva tests IBC: NCLAT's choice between judicial wisdom & commercial wisdom

The National Company Law Appellate Tribunal (NCLAT) will be hearing a petition from a major shareholder of Siva Industries, which plans to argue that the National Company Law Tribunal’s (NCLT) Chennai bench far ex­ceeded its powers while rejecting the commercial wisdom of the lenders. The Indian lenders had earlier decided to accept a 95 per cent haircut on dues wor­th Rs 5,000 crore from Siva Ind­u­s­­­­tries (see chart: “Total haircut”).

NCLT rejected the Committee of Creditors’ (CoC’s) proposal on the grounds that it would rather override the lenders’ commercial wisdom with its own “judicial wisdom” because it deemed the proposal was not in their best interests. Instead, the NCLT ordered the company be liquidated.

By ordering the liquidation of Siva Industries, one of the majority shareholders, Vallal RCK, has argued in the NCLAT that the NCLT has dealt the entire Insolvency and Bank­ruptcy Code, 2016, a heavy blow given that the commercial wisdom of the lenders is supreme while deciding on IBC cases, according to previous judgments of the Supreme Court (see: “What did NCLT say?”).

“It is important to understand that the Supreme Court judgments in the past holding the commercial wisdom of the CoC in approving a resolution plan under the IBC are fairly consistent and based on the principle that commercial matters should not become subject to judicial interference,” said Ajay Shaw, partner, DSK Legal, adding, “Whether there should be a framework for such commercial decision-making by the creditors is a subject matter of another discussion.”

As he pointed out, the Siva Industries case 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 with the promoters. In its ap­peal, Vallal said the NCLT has proceeded on an incorrect assumption: That if the settlement proposal is unimplemented, the defaulting company will be released from IBC process and the bankruptcy has to be started de-novo upon a fresh insolvency application being filed under IBC.

“The Tribunal has failed to appreciate that the intent and object of IBC is to prevent liquidation. The intent and object of Section 12A will be defeated if the settlement proposal is rejected on a supposition of non-implementation and instead liquidation is preferred over revival. None of the settlement proposals under 12A of the code will then pass muster,” said Vallal’s petition.

Siva Industries was set up by Chennai-based serial entrepren­eur C Sivasankaran who disasso­ciated himself from the company a decade ago and the company is now run by his ex­tended family members and his father, Vallal. The NCLT had also rejected a proposal by the promoters under Section 12A of the IBC, which gives promoters an opportunity to get back their company provided a majority of the lenders agree. In its order, the NCLT had said the CoC did not vote at all for the promoters’ settlement proposal; instead banks only voted on the withdr­awal of bankru­ptcy proceedings.

What did NCLT Say?

• Promoters can’t make one-time settlement offer as they are defaulters
• Lenders did not vote on one-time settlement but voted to withdraw bankruptcy process
• Court will use judicial wisdom rather than rubber stamping CoC’s “commercial wisdom”
• Checks and balances necessary to avoid arbitrary power misuse by the CoC

Vallal argued that the NCLT did not consider the view of the CoC, which had unanimously taken a commercial decision to recover more than the amount it would be able to receive in the event of liquidation, and the dismissal of the withdrawal application pursuant to Section 12A of the Code under the guise of “judicial wisdom” will infringe its “commercial wisdom”.

The NCLT has wrongfully interpreted the settlement plan as a business restructuring proposal and rejected it despite no such requirement contained under Section 12A of the Code or Regulations, said Vallal in his petition.

Vallal said the NCLT also neglected the fact that the settlement plan proposed by the promoters is more than the liquidation value of the Siva Indu­stries. “The Tribunal has wrong­­fully held that the CoC has not accepted the terms of the settlement proposal despite express language to the cont­rary contained in the Settle­ment Proposal read with the minutes of the meeting of the CoC held on April 1 this year,” he said.

UAE-based Masdar and Blackstone-backed Inter­national Asset Reconstruction Company currently own 40 per cent of Siva Industries’ Rs 5,000 crore debt. Of this, the PSU banks have Rs 3,442 crore of exposure. IDBI Bank, which has the highest exposure to the company, will lose a substantial amount of funds if the company goes into liquidation.

Siva Industries, a machinery part-maker, was admitted to the bankruptcy court on July 5, 2019. An offer from Royal Partners Investment Fund Ltd did not find favour with the banks and was rejected. The resolution professional then filed the liquidation petition before the registry.

But Vallal then filed an application before NCLT, Che­nnai, on August 31 last year asking the CoC to consider the one-time settlement (OTS) 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. The OTS was approved and the lenders filed the petition with NCLT to withdraw the bankruptcy proceedings. But the NCLT rejected the plan leading to fresh litigation in NCLAT.