Gaming the System

The withdrawal of Sterling Biotech Ltds insolvency proceedings and the manner in which it has been done has raised many eyebrows, including that of the National Company Law Tribunal (NCLT), which has asked the government to look into the case.

But the larger question that Sterling Biotech has raised is the possible misuse of a provision of the Insolvency and Bankruptcy Code that allows the Committee of Creditors (CoC) to withdraw insolvency proceedings against a debtor if 90 per cent of the CoC agrees.

This provision, say many, including the regulator and government authorities, may be misused by unscrupulous promoters to game the system in collusion with lenders as was alleged in the Sterling Biotech case; despite the promoters absconding from the country, the lenders not only withdrew insolvency proceedings but agreed to a one-time settlement by taking a 65 per cent haircut. Since the provision was introduced, six months back, there have been 80 withdrawals, whereas there have been just 88 resolutions in the last two years.

Experts believe there should be a time ceiling on how long this provision can be invoked and some have taken the view that once a resolution proposal is accepted, the CoC should not withdraw insolvency proceedings against a debtor.