[Shaleen Tiwari is an Advocate, Bombay High Court and a graduate of Hidayatullah National Law University, BA.LLB (Hons.), 2016]
This post represents a contrarian view to the one adopted in a November 17, 2017 post titled ‘The Jeopardy of Settlements in Insolvency Cases’. Forming the cornerstone of the discussion here is the recent Supreme Court order in Uttara Foods and Feeds Private Limited v. Mona Pharmachem, which expounded the same point of law as contained in its earlier ruling in Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP.
The Court, while allowing a settlement between the corporate debtor and the operational creditor following the admission of an insolvency petition, has assigned to the Ministry of Law & Justice the task of effecting the requisite amendments to Insolvency and Bankruptcy Code, 2016 (the ‘Code’). While exercising undisputed powers of the Court under Article 142 of the Constitution, Justice Nariman and Justice Kaul sought to override the limitation on withdrawal of a corporate insolvency resolution process (CIRP) as contained in Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
This development has already led to the Government forming a 14-member committee to review, inter alia, this recommendation. As some commentators and stakeholders point out, such a recalibration of the Code will lead to situations where the collective interest of the creditors will be jeopardized based on a compromise between the applicant creditor and the corporate debtor. Scepticism is likely to arise over whether such a provision in the Code will allow for arm-twisting techniques by by certain creditor/s initiating the CIRP and gaining favourable settlement terms with the debtor, thereby leaving the remaining creditors in the lurch.
However, an analytical construction of such a provision reveals itself in more salutary ways than one. First, it is vital to understand that a company admitted under the IBC for CIRP loses more goodwill and investor confidence than evaporating balance sheets and assets, notwithstanding that it will not go into liquidation. Such a company’s promoters are likely aware of the value of withdrawal of an insolvency petition against their company, which might be beneficial. As reference, the withdrawal of the insolvency application by Andhra Bank against HDIL, albeit before admission of the petition, saw the stock rally a healthy 5% the same day. This was followed by Morgan Stanley buying 29.18 lakh shares of HDIL during that week.
Secondly, contending that the dynamics relating to the withdrawal of a petition already admitted are different, the NCLT (Kolkata bench) in Re Parker Hannifin India Private Limited has aptly pointed out that on admission of a petition under Section 9 of the Code, ‘it assumes the nature of a representative suit and the lis does not remain solely between the creditor and the debtor’. Thus to remedy the possibility of the applicant creditor getting undue advantage in settlement, it is imperative to amend the Code in conformity with its inherent structure. In this regard, a withdrawal application must be allowed only after calls for submission of claims by way of public announcement and formation of the Committee of Creditors (CoCs) is complete. This way, the Code shall ensure that a settlement offer on the table should be between all creditors of the CoC and the debtor, thereby making it non-exclusionary and non-negotiable. Furthermore, considering that the CoC, with its claims in readiness, is constituted within 30 days of admission of the insolvency petition, no delays are likely to occur between admission and an offer for settlement.
Expectedly, such a settlement, even with its exhaustive nature, might be vulnerable to possible situations where a smaller creditor is coerced by the larger ones to settle for a more inferior bargain than theirs. However, with more cases like Synergies Dooray wherein the creditors have had to take an almost 94% haircut in the offing, it will be a question of lesser-of-the-two evils. Be that as it may, the silver lining in the settlement playbook is that promoters in India are sufficiently liquid in their personal wealth (see an earlier post ‘The Ability of Promoters to Bid for their own Companies in Insolvency’) despite fractured company balance sheets and accounting books. They would certainly leverage that wealth to pay off the creditors and reach a settlement to have their company reins back and perhaps even enjoy a bullish run in the market (see above HDIL).
It must be remembered that the founding intent of the IBC is the resolution of defaulting companies and creditor repayment in tandem. This may even be in the form of settlement between parties as long as the object of the exercise meets its intent. In its nascent stage, it is too early for the Code to deserve too pessimistic an outlook. Developed legal jurisdictions undergo frequent evaluations to weed out any anomalies. For instance, the UK Insolvency Act of 1986 has undergone substantially relevant changes by way of amendments, first in 2000 and then in 2002. Likewise, the United States Bankruptcy laws have undergone weighty changes right from 1978 through 1984, 1989 and most recently in 2005. Similarly, Singapore underwent a major overhaul in bankruptcy law reforms in 2013 and so did Italy in 2015 (the ‘credit crunch decree’). Such reforms on an ongoing basis may be necessary for the insolvency law to keep itself relevant with evolving financial conundrums and the accompanying legalities.
– Shaleen Tiwari