On 28 August 2019, the National Company Law Appellate Tribunal (NCLAT) delivered a major blow to the efforts of investigation agencies and allowed Andhra Bank and other lenders to withdraw their resolution application. By this order, the controversial Sterling Biotech Ltd is out of the liquidation process ordered by the NCLT (National Company Law Tribunal).
The order by a bench, headed by Justice SJ Mukhopadhyay, also allowed banks to accept money of Sterling Biotech’s absconding promoters with the caveat that it should be from individual accounts and should not be the proceeds of crime.
Since the money has flown to Nigeria where the ‘wilful defaulters’ are holed up to evade arrest, and are under investigation by all of India’s top investigation and enforcement agencies, it is unclear how anyone will separate clean funds from the ‘proceeds of crime’. This is especially difficult because the Sterling group has wilfully defaulted on payments to nine Indian banks and others for many years, while it was clearly diverting funds abroad.
NCLAT disposed all appeals by the investigation agencies. However, it said that the Enforcement Directorate (ED), Central Bureau of Investigation (CBI), ministry of corporate affairs (MCA) and the Securities & Exchange Board of India (SEBI) can continue to ‘take any action’ against the promoter, shareholders and directors under the existing laws, irrespective of the settlement made by them under the IBC (Insolvency and Bankruptcy Code).
Based on an appeal, NCLAT also set aside all the negative observations against the conduct of the ‘resolution professional’ who had faced the wrath of NCLT in the 8th May order.
As I mentioned earlier, NCLAT observes that its order will 'however, not come in the way of the individual', such as the promoter, shareholder or director, if the payments made by them are ‘not from the proceeds of crime’ but in their individual capacity and the amount is from their account—and not that of the corporate debtor.
It arrives at this decision because ‘there was nothing on the record to suggest that the individual property of the promoters’, who have offered a one-time settlement (OTS) to banks, is subject to restraint by the ED. Therefore, NCLAT concludes that, even if the assets of Sterling Biotech are held to be ‘proceeds of crime’, the prayer for withdrawal of the application cannot be rejected if promoters make a payment in their individual capacity.
This observation is frightening, for several reasons. Almost all wilful defaulters have amassed riches by diverting bank loans and skimming off the big listed entities that they had promoted. This money has been transferred overseas into personal accounts and is used to buy massive personal assets, homes and businesses overseas. Since Indian public sector banks (PSBs), like Andhra Bank, have no intention of going into these assets, will the money now be considered ‘individual’ wealth that is squeaky clean?
Well, not really. The NCALT order covers those bases and adds to the confusion with a specific observation that proceedings under the Prevention of Money Laundering Act (PMLA) will continue against the ‘corporate debtor’, which is Sterling Biotech. How can a company be held responsible for money laundering and not the absconding promoters (either individually or jointly and severally), who would have initiated or ordered laundering transactions?
The Sterling group’s four promoters—Nitin Sandesara, Chetankumar Sandesara, Dipti Chetan Sandesara and Hiteshkumar Patel—are absconding and are known to be holed up in Nigeria where they have extensive businesses. They have extradition orders issued against them by a Delhi court. They are facing multiple investigations, criminal charges and extradition proceedings by the CBI, SFIO (Serious Frauds Investigation Office) and ED. Isn’t it hard to digest that these promoters have clean funds in individual accounts which ought to be acceptable to banks? What, indeed, is the source of these clean funds? And who will establish that?
The 24-page NCLAT order makes absolutely no mention of the massive figures that we are talking about. To understand this in the right context, let us remember that finance minister (FM) Nirmala Sitharaman has ordered the infusion of Rs70,000 crore from the exchequer into a set of PSBs on 31st August and the government has also appropriated Rs1.76 lakh crore of Reserve Bank of India’s (RBI) reserves to meet its funding requirements.
As against this, the Sterling Biotech and its sister entity Sterling SEZ alone owe Rs15,600 crore to a consortium of Indian banks. Of this, Sterling Biotech owes Rs7,500 crore and Sterling SEZ owes over Rs8,100 crore. Sterling Biotech has now offered to pay Rs5,500 crore as an OTS , and Sterling SEZ, whose case may be decided shortly, has reportedly made a similar offer. This, essentially, means that they got an interest-free loan at public cost that allowed them to build a big business overseas. And, yet, we are outraged when farmers demand a loan write-off!
Over 90.32% of the lenders to Sterling Biotech, led by Andhra Bank, voted to accept this OTS. As I wrote on 28th May, the promoters have already remitted some money through Nitin Sandasera’s company, VELL FLO Limited which has a registered office at 252, Muri Okunola Street, VI, Lagos (Nigeria).
The banks have a single-point argument—they will recover significantly more money from the dubious promoters than they would if the company went into liquidation. But accepting this argument would mean that Essar Steel’s offer to payback over Rs54,000 crore to all creditors (including operational creditors) must be considered superior to the Rs42,000 crore offer from LN Mittal of Arcelor Mittal. Already, a controversial NCLAT order in the Essar Steel case by the same judge has led to a quick amendment of the bankruptcy law and the Essar case is pending in the Supreme Court.
Clearly, the Sterling issue ought not to end with this order and should be decided along with the Essar Steel case. But who will file an appeal, when all the lenders are desperate to accept the OTS?
It will also be interesting to watch whether the investigation agencies truly want to book the politically-connected Sandesaras, or whether the investigation is more of a witch-hunt to settle political scores. A day after the NCALT order, the ED was busy grilling the son of Ahmed Patel, a Congress politician who is very close to Sonia Gandhi. And, yet, anyone in Gujarat will tell you that the Sandesara family has powerful links across the political spectrum, including the ruling coalition, and its favourite CBI officers such as a former joint director Rakesh Asthana. The investigation agencies ought to appeal the NCLAT order, if they are serious about bringing the absconding promoters back.
Finally, the big question is: Will the promoters come back to India to face investigation (the door to which has been kept open in the NCLAT order) or be allowed to control management from Nigeria? Also, will the government, at the very least, ensure that banks do not provide fresh loans to this dubious group? Remember, the bailout of PSBs continues to happen without making senior management more accountable for their lending decisions.