Rapid rise in cases withdrawn under IBC, raises concerns over the misuse of section 12 A

BL Research Bureau

Aside from the undue delays in the IBC process, there is yet another growing issue that needs attention. Section 12 A was inserted in the IBC Code in June 2018 to allow withdrawal of insolvency application by the applicant with approval of members of CoC (committee of creditors) with 90 per cent voting share.

In other words, the section allows the corporate debtor another chance to make good on the default, and regain control over the company. But the rapid rise in the number of cases withdrawn under Section 12 A, are raising concerns over the misuse of this provision.

Read more:The IBC conundrum

Sample this: According to IBBI data, as of June 2019, of the 2162 cases admitted, 101 were withdrawn under section 12A, while just 120 cases saw resolution. The number of cases withdrawn under 12A have been going up sharply since the December 2018 quarter, when the data on such cases was first disclosed. From 63 in the December 2018 quarter, to 91 in the March 2019 quarter to 101 in the latest June quarter, the growing number of cases withdrawn under this provision, calls for further scrutiny.

Also according to the IBBI Apr-June report, which lists out the reason for withdrawal under 12 A, of the 101 cases, only 28 cases saw full settlement with the applicant (lenders), 6 saw full settlement with other creditors, while 34 cases saw other settlements with creditors. Interestingly in two cases, the corporate debtors were not traceable and in one the debtor was struck off the register.

The Sterling Biotech case

The intent of Section 12 A was to give the corporate debtor a chance to regain control over the company by making a fresh offer to lenders. But the rise in cases of withdrawal and interpretations under varied rulings have warranted some attention.

The most contentious case is that of Andhra Bank vs Sterling Biotech, where the National Company Law Appellate Tribunal (NCLAT) recently allowed the withdrawal of insolvency application and allowed for the settlement with the creditors, despite NCLT (National Company Law Tribunal) raising concerns over the promoter being an absconder and questioning the sources of funds.

In this case, in the initial round, the resolution to withdraw the insolvency (submitted by Andhra Bank), resolution plan submitted by Associated Capsules Private Ltd and resolution for liquidation—all failed to meet the requisite voting share by the CoC. Subsequently Andhra Bank filed a fresh proposal for withdrawal under 12A, which was able to garner 90.3 per cent voting share. But the NCLT refused to accept the one-time settlement (OTS) offer by the Sandesara group (promoters of Sterling Biotech). It raised doubts about how the proposal submitted by Sandesara Group was accepted by the financial creditors when Sterling Biotech’s promoter/director is an absconder. The NCLT had asked to hear from the Ministry of Corporate Affairs, Income Tax office, Enforcement Directorate, SEBI, CBI and RBI before deciding the case.

Also read : ED attaches Sterling Biotech promoters’ assets worth ₹9,778 crore

“If we allow the application then it will be a gross misuse of the provision of 12 A, by the person, who is not eligible to file an application under Section 29 A and get control of the company under the guise of Section 12 A”, the NCLT had ruled. The Section 29A was inserted in the Code to keep out errant and wilful defaulters from buying back assets.

But the NCLAT in its August 28 ruling overturned the NCLT order stating that Section 29A is not applicable for considering an application under Section 12A. Given that the application under Section 12A having been approved by the CoC (more than 90 per cent voting share), it was not open to the adjudicating authority to reject the same, that too on a ground of ineligibility under Section 29A.

The NCLAT’s ruling has now opened a pandoras box and raised concerns over defaulting promoters getting their companies back at a steep discount. The NCLT had pointed out that the promoter in this case would be regaining control of the company at 64 per cent discount---at Rs 3110 crore against a total claim of Rs 9053 crore.

The Sterling Biotech case highlights the possible issues with the use of Section 12 A in various cases. After all, the purpose of the IBC would be defeated if wilful and fraudulent defaulters are given an entry under the guise of the 12 A provision. The IBBI is said to be closely monitoring cases withdrawn under Section 12 A.

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