After recent instances of a defaulter misusing a provision (Section 12A) to retain control of the firm by repaying a fraction of the dues to the lender, two officials said the government may review the legal provision that allows withdrawal of an insolvency case in favour of a one-time settlement (OTS).
According to officials with direct knowledge of the matter who requested anonymity, IDBI Bank-led lenders discussed and approved an OTS proposal of Siva Industries in April 2021, in which creditors agreed to take a 93.4 percent haircut to settle 4,863 crore dues. On April 8, 2021, a withdrawal application was filed with the National Company Law Tribunal (NCLT) in Chennai under Section 12A of the Insolvency and Bankruptcy Code (IBC). That means the banks were able to recover 318 crore, including a 5 crore upfront payment.
On June 15, the NCLT questioned the lenders’ agreement to take a large haircut (95.85%) in the insolvency resolution of Videocon group companies.
According to data from the Insolvency and Bankruptcy Board of India (IBBI), banks have taken an average haircut of 80 percent in over 363 major NCLT resolutions since 2017. Deccan Chronicle (95 percent), Lanco Infra (88 percent), Ushdev International (94 percent), and Zion Steel (99 percent) are among the large haircuts, according to the report.
“We are unable to comment on a specific case before the National Company Law Tribunal (NCLT). Government agencies and regulators, on the other hand, keep a close eye on all such developments. Laws can be amended to close loopholes and strengthen the Insolvency and Bankruptcy Code (IBC) if necessary, according to one official.
On June 25, the NCLT’s Chennai bench will hear the out-of-court settlement agreement between Siva Industries’ promoters and IDBI Bank-led financial creditors under the IBC.
The ministries of corporate affairs and finance, the department of financial services (DFS), the Insolvency and Bankruptcy Board of India (IBBI), the Reserve Bank of India (RBI), IDBI Bank, and the Life Insurance Corporation of India (LIC) did not respond to email inquiries.
Siva Industries and Holdings’ Resolution Professional (RP) did not respond to an email inquiry about this matter.
“It’s not easy to deceive the system. An OTS proposal related to Sterling Biotech was previously rejected, with creditors agreeing to a 64% haircut on over 9,000 crore in dues. “How does one reach an agreement with fugitive promoters?” the second official wondered.
