NCLT verdict in Siva Industries case questions commercial wisdom of banks

Following the decision of the National Company Law Tribunal in Chennai in the matter of Siva Industries and Holdings Limited, the commercial acumen of lenders in the corporate debt settlement process has once again come into sharp light.

The Division Bench of the NCLT Chennai rejected Siva Industries’debt settlement proposal, which had been accepted by the company's lenders, known as the committee of creditors (CoC), and ordered the company's liquidation. According to the tribunal, the proposal was an "enterprise restructuring plan" rather than a settlement as defined under Section 12A of the Insolvency and Bankruptcy Code.

The NCLT also rejected a request by the lenders, led by IDBI Bank, to stop the bankruptcy proceedings against Siva Industries due to uncertainty in the plan. The NCLT ruling is important because it was issued shortly after the Parliamentary Standing Committee on Finance published a report to both chambers of Parliament on 3 August titled "Implementation of the Insolvency and Bankruptcy Code - Pitfalls and Solutions”. The ‘commercial wisdom of CoC is supreme’, according to the Ministry of Corporate Affairs. “In the committee's opinion, and in light of the committee's previous experience, a professional code of conduct for the CoC is urgently needed, which will define and circumscribe their decisions, as these have larger implications for the Code's efficacy,” the Parliamentary Committee stated in the report.

The panel also recommended that more open standards be developed for the CoC's selection of resolution specialists. The study stated that “during the corporate insolvency resolution process, the CoC determines whether to keep the interim RP as the resolution professional or to replace the interim RP with another resolution professional without any guidelines.” It wants the Insolvency and Bankruptcy Board of India to provide more open standards for the appointment of resolution specialists.

“The defaulters' utopia is no longer,” the study stated, citing the Insolvency and Bankruptcy Code's “great success” in changing India's credit culture. In light of the Parliamentary Committee findings, the NCLT judgement in the Siva Industries case must be considered. The jury's decision appears to confirm the panel's concerns. Section 12 A of the IBC permits insolvency cases to be dropped with 90 percent of the voting share of the CoC members' consent. In the instance of Siva Industries, the lenders approved promoter C. Sivasankaran's one-time settlement plan with the requisite voting share.

The CoC should have accepted the promoter's request only if the money would be paid in whole, according to the NCLT. The NCLT expressed concern when the CoC failed to do so. The suggested one-time settlement was for Rs 500 crore, or a tenth of the total amount owing to the banks of Rs 5,000 crore. The NCLT decision was unexpected, especially because the Paramount Court had previously said that the CoC's commercial judgement was supreme. The Parliamentary Committee may have wanted to prevent the uncertainty in the CoC's judgement, which was alluded to by the NCLT in the Siva Industries case, when it proposed drafting a code of conduct for the CoC.

The report stated that “during the corporate insolvency resolution process, the CoC decides whether to keep the interim RP as the resolution professional or to replace the interim RP with another resolution professional without any guidelines.” It urged the Insolvency and Bankruptcy Board of India to create more transparent rules for the appointment of resolution professionals.

“The defaulters' paradise is no more” the report added, citing the Insolvency and Bankruptcy Code's “great success” in changing India's credit culture.

In light of the Parliamentary Committee report, the NCLT judgement in the Siva Industries case must be considered. The jury's decision appears to confirm the panel's concerns. The NCLT decision was unexpected, especially since the Ultimate Court had previously stated that the CoC's commercial judgement was supreme.

The Parliamentary Committee may have wanted to avoid the uncertainty in the CoC's ruling, which was alluded to by the NCLT in the Siva Industries case, when it advised creating a code of conduct for the CoC.

A deeper examination of the NCLT order raises the question of whether the CoC may be considered infallible in its decision-making. Except for the requirement of a 90 percent vote share to pass a proposal, there appears to be no transparent and well-defined mechanism for decision-making by the CoC at this time. The Parliamentary Committee's report also mentioned the CoC's "considerable discretion" in adopting late and unsolicited resolution plans. “These late, unsolicited offers generate a great deal of procedural ambiguity. As a result, legitimate bidders are deterred from bidding at the appropriate time, according to the panel.

This harmed the debt resolution process and caused significant delays, eroding value. “There should be sanctity in timelines so that value is safeguarded and the process goes smoothly,” the committee stated in recommending a change to the IBC. A rule of conduct for the CoC might increase openness and eliminate uncertainty like that seen in the Siva Industries case. Resolution is rejected if it is delayed. If the CoC is supreme, it should also be free of suspicion.