Sterling Biotech Insolvency: Opening up Pandora’s Box
Article by Dhiraj Rao a 4th year student of Dr Ram Manohar Lohiya National Law University, Lucknow,
The National Company Law Appellate Tribunal (“NCLAT”) reversed the order of NCLT while adjudicating upon the matter concerning insolvency of Sterling Biotech. The NCLAT allowed the creditors to withdraw the insolvency petition as per section 12A of the Insolvency and Bankruptcy Code (“IBC”), 2016 and to settle with the promoters of the Corporate Debtor. Thereby, allowing the promoters of the Corporate Debtor to take the control after making full payment to the lenders.
An application under section 7 of IBC was filed by Andhra Bank against Sterling Biotech in June 2018. Apart from defaulting loan of Rs 8,100 crore, the promoters of the debt-ridden Sterling Biotech were already facing charges of corruption and money laundering. The promoters of the Corporate Debtor absconded and government agencies like Enforcement Directorate and CBI were unable to trace them. Thereafter, a one- time settlement (“OTS”) offer was made by Farhad Daruwalla on behalf of the promoters of the Corporate Debtor to the creditors. The offer stated that the entire payment under OTS shall be made by the promoters and not through the corporate debtor and its properties. The offer got a green signal by the committee of creditors (“COC”). It subsequently prompted filing of withdrawal application as per section 12A of IBC. However, the NCLT slammed the application and sent the Corporate Debtor for liquidation.
In its order dated 28.08.2019, The NCLAT reversed the impugned order dated 08.05.2019 of NCLT and allowed the appellant to withdraw the application. The Appellate Tribunal stated that promoters should be permitted to make OTS if they promise to make payment to the creditors in their individual capacity. It was further observed that although section 29A of IBC disqualifies promoters and connected entities from bidding for stressed assets, the law does not apply in the case of withdrawal of application under section 12A. Application of both the sections is mutually exclusive and they operate in different arenas. Lastly, it was stated that once the application for withdrawal has been approved by more than 90% of the COC, it is not open for the Adjudicating Authority to reject it. The Adjudicating Authority shall not interfere with the commercial decisions of the COC.
Critical Analysis of the Judgement
It seems that the Appellate Tribunal have erred in reversing the order of NCLT to liquidate the Corporate Debtor. The decision has opened a backdoor entry route for defaulting promoters. Section 29A of the IBC disallows defaulting promoters from bidding for stressed assets and submitting resolution plan. It is pertinent to note that the OTS made by the promoters was nothing but a resolution plan. It exposed the creditors to deep haircuts and allowed the absconding promoters to get back the control of the debt ridden company by only paying 35% of the dues. Moreover, nothing was placed on record to show that Mr .Farhad Daruwalla, who introduced the offer was duly authorised by the promoters to represent them before COC.
Apart from this, section 12A of IBC provides discretion to the Adjudicating Authority while considering the withdrawal application and therefore, uses the word “may”. If the Adjudicating Authority is convinced that the promoters of the corporate debtor have vitiated any of the grounds or have been able to prevail upon the 90% for reasons contrary to law, the Adjudicating Authority may refuse a withdrawal application. However, NCLAT presented a different interpretation. It stated that once the application has been approved by COC with more than 90% votes, the Adjudicating Authority cannot disallow it. This stance of restricting the discretion of NCLT can be perceived as an attempt to frustrate the objective of the legislation.
Moreover, it seems that the Appellate Tribunal has blindly relied on the financial wisdom of the committee of creditors. It has not taken into consideration the previous record of the defaulting promoters. Going by the charges labelled against the promoters, it is tough to absorb that they have clean funds. The commercial wisdom of the COC should be respected, however, that should not restrict the Appellate Tribunal from checking the veracity of the funds. The viewpoint of NCLAT has created an aperture as to who will determine whether the settlement amount is proceeds of crime or not.
A Concluding Look
The finding of NCLT can open up a pandora’s box for upcoming insolvency matters. It can set a precedent that will enable the errant promoters to have the last laugh by getting back the control of the company once they make full payment to the creditors. It would mean giving back the control of the corporate debtor to those who contributed to its downfall. This issue ought not to end on this note and should be decided by the Apex Court. However, it is tough to perceive an appeal as the creditors have welcomed the order of NCLAT with open arms since they are getting more money through OTS than they would have got in the case of liquidation.