Siva Industries’ Insolvency: NCLT Rejects Settlement Proposal By Promoter

Commercial wisdom of the creditors’ committee can be questioned when withdrawal from IBC is proposed, the tribunal said.

A gavel sits on a stage. (Photographer: Daniel Acker/Bloomberg)
A gavel sits on a stage. (Photographer: Daniel Acker/Bloomberg)

The bankruptcy court has to be vigilant while considering a settlement proposal. And the commercial wisdom of the committee of creditors can be questioned by court when an application of withdrawal from the insolvency process is made, the Chennai bench of the National Company Law Tribunal has held in the case of Siva Industries, promoted by C Sivasankaran.

The promoter entity of Siva Industries and Holdings Ltd. had proposed Rs 328.21 crore as settlement amount against the financial creditors' admitted claims of Rs 4,863.88 crore.

Siva Industries’ Insolvency: NCLT Rejects Settlement Proposal By Promoter
In rejecting this proposal, the tribunal said it’s "only required to permit unprejudiced settlement plan to succeed. There is always a system of constant checks and balances where there must not be a capricious or arbitrary power given in the hands of CoC to accept or reject settlements, it noted."

The court will refrain from questioning the commercial wisdom of the CoC only when the decision has been taken in conformity with the Insolvency and Bankruptcy Code, 2016, the NCLT said in its order.

But in this case, it pointed out, without even receiving a single penny from the promoter, the CoC has approved the withdrawal plan. This is not a settlement but a business restructuring plan, the tribunal said while pointing to a specific clause in the proposal.

The clause laid down the effective date and failure of approved settlement plan. It said:

This document constitutes a binding proposal of the promoters in respect of settlement dues of the company. However, the proposal of the promoters is subject to negotiation with the committee of creditors. Therefore, the terms of the approved settlement plan may be different from the terms proposed herein.
Clause 2, Chapter VII of Settlement Proposal

This posits that even after the proposal is approved, the promoter can change the terms, the tribunal noted. The court is not a mere stamping authority so as to endorse the decision of the CoC and is required to examine whether their decision is in conformity with the IBC provisions, the order stated.

“…whether the corporate debtor is required to be wriggled out of CIRP is to be decided by the adjudicating authority by exercising its judicial wisdom and cannot be carried away by the commercial wisdom of the CoC…”

The promoter, who is ineligible to submit a resolution plan, is trying to restructure the loans under the pretext of a settlement proposal, the NCLT said.

In denying approval to the settlement proposal, the tribunal has also made another important observation.

The resolution for withdrawal was approved by the CoC with a majority vote of 94.23%. But the minutes have not stated that the CoC has accepted the settlement proposal given by the promoter. The settlement proposal per se was not put to vote by the members of the CoC.

Siva Industries’ Insolvency: NCLT Rejects Settlement Proposal By Promoter

The CoC should’ve voted for withdrawal only after receiving the full amount under the settlement proposal. This because if any default occurs after withdrawal has been allowed, the law doesn’t allow for liquidation.

“…this tribunal will be left in lurch when there arises any default since it would be uncertain as to how to proceed when the corporate debtor is out of CIRP and there arises a legal quagmire.”

Due to the ambiguity in the terms of settlement, the withdrawal application cannot be approved, the NCLT said.

Since the 330 days for resolution under IBC expired, the resolution professional's application for liquidation was accepted by the NCLT.