4863 Crores is equal to 323 Crores?

Introduction

There is a word out in the legal arena about a review committee to be formed for the review of legal provisions that allow for the withdrawal of an insolvency case in approbation of an often-negligible one-time settlement (OTS).

The Siva Industries Case

What shall one anticipate when a bank loan of roughly to the tune of INR 5000 Crores (4863 Crores to be exact) is settled for a meager INR 323 Crores. Interestingly, the CoC member and biggest bank of the country SBI dissented against the settlement proposal.

Moreover, the case becomes even more important when the lenders are withdrawing the bankruptcy process of Siva Industries and Holdings. Furthermore, what may be important here to note is that; the settlement amount accepted by banks is said to be even lower than the liquidation value of Siva Industries and Holdings, and; it will result in a loss of approx. Rs. 4,700 Crores of public money. Interestingly, IDBI Bank as the lead banker is settling the case with the same promoter who was earlier charged by CBI for defrauding the same lender to the tune of Rs 600 Crores along with the other than posted senior officials of the bank. This is a matter of concern as this particular case might set an appalling precedent and defeat the purpose of the Insolvency and Bankruptcy Code, 2016.

 What happened?

Lenders of Siva Industries and Holdings Limited, founded by Mr. C. Sivasankaran, who is the former promoter of Aircel have filed applications under Section 12A of Insolvency and Bankruptcy Code, 2016 (IBC) in the Chennai Bench of National Company Law Tribunal (NCLT) for withdrawing the insolvency proceedings against company. In the month of April, the creditors led by the IDBI Bank discussed and; approved a one-time proposal of Siva Industries, where creditors agreed to cut their claims by a major 93.4%, bringing 4863 Crores to a meager INR 323 Crores. Lenders have also agreed to withdraw all pending legal proceedings against Sivasankaran’s Companies as part of the resolution plan.

On June 15, NCLT questioned the extensive haircut (95.85%) that; lenders have agreed to take in the insolvency resolution of Videocon group firms. According to data from the Insolvency and Bankruptcy Board of India (IBBI), in over 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80%.

The Flaw in the law

The State Bank of India which is a member of the CoC has opposed the settlement plan and has marked its strict reservations against the said one-time proposal in the NCLT.

The State Bank of India, in a detailed response to Zee Business, had clarified:

“SBI is not a lender to Siva Industries, hence these queries may be addressed to the Lead Lender or COC for the company. Incidentally, SBI was a lender to one of the group companies that was guaranteed by Siva Industries. As part of the CIRP process of Siva Industries; SBI’s claim on invocation of this corporate guarantee was included in the claims admitted; which amounts to 5.77% of the total claims. SBI has voted against the proposed compromise offer and has already filed its motion before NCLT to protect its interests.”

Section 12A was added by an amendment of IBC in 2018, which allows the parties to close an insolvency case with the approval of 90% of the committee of creditors (CoC). However, it now appears that this exit process is being wrongly used in multiple cases.

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Written by

Abhishek Khare Advocate