Absconding promoters get back control of Sterling Biotech

The promoters of Sterling Biotech have managed to take the company back from the clutches of liquidation after the National Company Law Appellate Tribunal (NCLAT) rejected a slew of appeals opposing the move by the creditors of the company to withdraw insolvency proceedings against it. In its order dated August 28, the NCLAT, the appellate tribunal under the IBC, said that promoters of the group cannot be disallowed from applying for one-time settlement and withdrawal of insolvency proceedings against the company if the promoters on their capacity promised to pay the money required for one-time settlement. It, therefore, set aside the liquidation order of NCLT and allowed the promoters to take back their company subject to payment of all dues.

The NCLAT order said that insolvency law only bars promoters from submitting a resolution plan and that the provision should not come in the way of a promoter seeking one-time settlement within the framework of the law. The NCLAT order, however, stated that the law enforcement agencies can continue to pursue cases against the company and promoters under the existing laws.

The National Company Law Tribunal, an adjudicating authority under the Insolvency and Bankruptcy Code (IBC), had earlier on May 8, 2019 ordered liquidation of the company after it raised concerns over the manner in which one of the financial creditors, Andhra Bank, had approached it for one-time settlement and withdrawal of the IBC proceedings against the company, whose promoters are absconding from the country.

The promoters of the group - Nitin Sandesara, Chairman and Managing Director and Chetan Sandesara, Joint Managing Director - are being investigated by various law enforcement agencies such as the Enforcement Directorate and CBI. The promoters of the group have been accused of money laundering and bank frauds involving Rs 8,100 crore.

Also read: Sterling Biotech scam bigger than Nirav-Choksi; Sandesaras took Rs 9,000 cr loan from Indian banks overseas: ED

The NCLAT had earlier stayed the NCLT order for liquidation of the company. Sterling Biotech owed over Rs 9,000 crore to various creditors. NCLT in its liquidation order had raised concerns over how financial creditors agreed for a one-time settlement without verifying the source of fund from which the promoters promised to pay them. It had also said that if the one-time settlement proposal is accepted, the promoters would get the company back by paying Rs 3,110 out of around Rs 9,000 crore dues, a hair cut of 64 per cent.

IBC bars promoters from bidding for their companies under insolvency proceedings. However, it allows insolvency proceedings to be withdrawn if 90 per cent of the financial creditors by exposure agree to the same. The NCLAT order on Sterling Biotech is significant as it allowed promoters of a company, which had been sent for liquidation, to win it back at a discount of 64 per cent.

Harsh Pais, partner, Trilegal, said the order was incorrect for two reasons. "Once a case has been admitted under IBC, a resolution of the same, under which creditors take a haircut, must be preceded by a transparent bidding process. Otherwise, the value of the bankruptcy estate relative to the size of the haircut is not tested," he says.

Secondly, he finds the order incorrect as it 'appears to circumvent Section 29A'. Section 29A bars promoters from bidding for a company under IBC. "The NCLAT order took the view that Section 29A does not apply to an application for withdrawal under Section 12A of the IBC. However, this seems to overlook the point that the so-called one-time settlement in the case was similar to a resolution plan since it entailed a haircut for creditors after the case was admitted," says Pais.

Also read: Sterling Biotech case: Ahmed Patel's son Faisal appears before ED