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One-time-settlement a legitimate way to avoid liquidation under bankruptcy law

This out-of-court deal may have triggered quite an interest in varied circles for assorted  reasons, but the creditors have played by the book in clearing the deal.

Published: 20th May 2021 10:10 AM  |   Last Updated: 20th May 2021 10:48 AM   |  A+A-

Bankruptcy law.

Bankruptcy law.

The recent decision of the creditors to drop bankruptcy proceedings against Siva Industries and Holdings by accepting the one-time settlement (OTS) offer from its promoters has set the tongues wagging with some section alluding to some kind of wrongdoing. 

However, given the fact that the spirit of Insolvency and Bankruptcy Code (IBC) lies in the resolution of corporate debt and not in liquidation per se of the debt-ridden defaulting company, the decision of the creditors makes ample sense.  The offer made by the  promoters is higher than the liquidation amount. This out-of-court deal may have triggered quite an interest in varied circles for assorted reasons, but the creditors (which include IDBI, Central Bank, LIC and others) have played by the book in clearing the deal.

This out-of-court deal may have triggered quite an interest in varied circles for assorted reasons, but the creditors (which include IDBI, Central Bank, LIC and others) have played by the book in clearing the deal.

Previously in IBC, there had been no provision for the withdrawal of an application filed before the NCLT (National Company Law Tribunal) except as provided for in Rule 8 of the Insolvency and Bankruptcy (Application to the NCLT) Rules of 2016. Under this rule, NCLT could permit the withdrawal of the application on a request by the applicant prior to its admission.

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Subsequently, Section 12A was inserted through an amendment Ordinance dated 6 June 2018. This gives the adjudicating authority power to allow withdrawal on application by CIRP applicant with 90 per cent voting share approval of CoC (committee of creditor) in such a manner as “prescribed”. In the case of Siva Industries and Holdings Ltd, the creditors cleared the out-of-court settlement with more than 90 per cent voting share approval of CoC. The clearance under 12A requires a much larger voting share approval (90 per cent) unlike the resolution plan which needs 66.67 per cent voting share approval by CoC.

It is gleaned from informed sources that the deal is a civil settlement. The 12A settlement, to be sure, doesn’t fully absolve the promoters of their responsibilities vis-a-vis their past actions. This is not the case in a resolution plan, which provides resolution applicants (Section 29A of the IBC bars promoters from acting as resolution applicants) a far greater shield for the past decisions or actions of the company under corporate insolvency resolution process (CIRP).

Nevertheless, the 12A option is intended to ensure that the company survives to live another day and perhaps carry on longer. That 12A is included in IBC is an indication that liquidation could at best be the avoidable last resort. The one-time-settlement must be looked at from the prism of what is called the opportunity cost in economics. If banks don’t settle for that, what do they gain or lose? They may or may not get the desired money. Any auction during pandemic times like the one we are now currently undergoing is likely to result in very poor realisations.

Liquidation would result in not just the usual liquidation haircut, but also a long period of realisation. Settlements, on the other hand, usually have a much shorter implementation timeline when compared to resolution plans. How will the Siva Industries and Holdings Ltd’s episode play out? The action of the company’s creditors will be debated until the cows come home. The fact, however, is that the 12A option is legitimately available to it. Indeed, it is within the confines of rule.

Will this development trigger a new kind of dialogue with promoters to accelerate debt recoveries? Last year, in the midst of Covid-19, more than 60 per cent of the NCLT cases ended up in liquidation under IBC.Well, 12A settlements should be read in this context as well. 

(The writer is a senior financial journalist based in Chennai)



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