The National Company Law Tribunal’s decision to approve a repayment plan for media entrepreneur Subhash Chandra has raised a whole lot of questions about creditor voting rights and the extent to which India’s insolvency system should be broadened.
The NCLT has approved a personal insolvency repayment plan under which creditors would receive around ₹6.5 crore against admitted claims of nearly ₹22,000 crore. The outcome is an extremely steep haircut and has raised questions in some quarters about whether individuals with close financial and familial ties to a personal guarantor should have been allowed to vote on the resolution plan.
The main issue was the involvement of five entities in the Committee of Creditors (CoC). Under the Insolvency and Bankruptcy Code (IBC), the tribunal held that the entities did not legally qualify as “associates” of Chandra and therefore were allowed to be part of the voting process.
Why the five entities became controversial
The five entities named in the proceedings were Veena Investments Private Limited, Direct Media Distribution Ventures Private Limited, World Crest Advisors LLP, Lemonade Capital Advisors LLP and Corpcall Capital Advisors LLP.
The opposing creditors argued that the companies had close links with Chandra and the wider Essel Group network. The five entities collectively owned about 61.78% of the voting power among creditors linked to Essel Group companies for which Chandra had provided personal guarantees.
Veena Investments is controlled by Sushila Devi Goel, wife of Jawahar Goel, Chandra's younger brother. Direct Media Distribution Ventures and World Crest Advisors are subsidiaries of Veena Investments.
The other entities were linked through overlapping directors and partners with companies associated with the Essel Group.
Several lenders like LIC Housing Finance, HDFC Bank, Axis Bank, Canara Bank and RBL Bank challenged their participation. The dissenting lenders together represented close to 20% of the CoC voting rights.
What did the NCLT rule?
The IBC wording was the focus of the tribunal rather than commercial relationships.
Under the relevant provisions, an “associate” is determined through ownership and control. The tribunal found that the statutory test depends on whether the debtor, individually or together with associates, owns more than 50% of an entity or controls its board or governing body.
The tribunal therefore concluded that commercial influence, family relationships or business proximity alone were not sufficient to disqualify the five entities from voting.
The ruling aptly illustrated the difference between legal and commercial control.
This distinction has been one of the most hotly debated aspects of the case because creditors argued that entities close to Chandra could influence the outcome of a plan concerning his own personal insolvency.
Does the ruling expose an IBC loophole?
Legal experts have been divided.
One interpretation is that the NCLT correctly applied the law as it stands. Since excluding people from voting is a big legal disability, creditors have to prove that the statutory conditions for disqualification have actually been met.
But one of the limitations of the current definition is that it is too broad to prevent conflicts of interest.
If a personal guarantor can maintain close economic or family relations with entities without formally owning or controlling them, such entities may potentially remain eligible to vote despite having interests that could overlap with those of the guarantor.
This has led some lawyers to characterize the case as a case that indicates that there is a structural disconnection between the letter of the law and creditor independence in general.
Chandra disputes the ₹22,000-crore narrative
Chandra has also challenged the way the size of the liability and the resulting haircut have been depicted.
According to his position, the ₹22,000-crore figure is not a simple personal loan liability owed directly by him. His proceedings are about liabilities arising from personal guarantees provided for borrowings by group companies.
Chandra has said that the banks involved in his personal insolvency proceedings were owed around ₹3,992 crore, of which about ₹620 crore had already been settled, while another ₹1,063 crore had been offered by the borrower companies.
He’d also like to have an independent audit of the amount borrowed and the amount already repaid.
Government sources have also indicated in reports that only a portion of the larger figure relates to loans where Chandra had given personal guarantees at the time of the original borrowing.
The distinction is important because insolvency proceedings against the corporate borrower and its personal guarantor can proceed separately under the IBC.
Why the claim can appear much larger
Legal experts have pointed out that interest accrued on the underlying corporate debt can affect the claim amount against a personal guarantor.
A creditor must invoke the guarantee and follow the prescribed process before beginning personal insolvency proceedings against the guarantor. As interest can continue to accrue until the guarantor enters the insolvency process, the eventual claim figure can appear much larger than the original principal amount.
The Supreme Court has also recognised that insolvency proceedings against a corporate debtor and its personal guarantor can proceed simultaneously.
Therefore, the ₹22,000-crore figure needs to be understood in the context of the underlying corporate borrowings, guarantees, interest and the separate insolvency processes.
Chandra’s net worth becomes another flashpoint
Another big issue was Chandra’s net worth.
Creditors highlighted historical certificates which valued his wealth at several thousand crores. One certificate in 2017 put his wealth at around $7.17 billion, and another one in 2018 placed his wealth at around ₹40,562 crore.
Based on this reason, Chandra's present disclosed net worth of around ₹31.79 crore became a major point of contention.
Creditors wanted a more thorough investigation in forensic examination and asset tracing, as they wondered if assets could have been transferred or concealed.
Chandra rejected the earlier valuations, arguing that the numbers reflected the market value of promoter group companies and not his personal wealth. He also pointed to earlier public disclosures showing a much lower personal net worth.
The tribunal noted the vast difference but found that a discrepancy alone did not prove fraud, concealment and diversion of assets. It also rejected the demand for a forensic audit as a prerequisite for approving the repayment plan.
What the case could mean for India’s insolvency regime?
The Subhash Chandra case could have implications beyond the immediate repayment plan.
The key question is whether the current definition of an “associate” under personal insolvency proceedings is sufficiently effective in dealing with entities that may have strong economic or familial connections with a personal guarantor but do not meet the formal ownership or control threshold.
Legal experts have suggested that Parliament could look at whether the definition needs to be closer to the related-party framework that corporate insolvency proceedings adopt.
For creditors, the case also tells us that transparency and credible financial information are of utmost importance in repayment discussions.
For the insolvency system, the situation raises a crucial question: is formal legal ownership and control the only test? Or does the law also have a sense of the commercial power and relationships as well? The NCLT ruling has answered that question based on the law as it is written. Whether the controversy eventually comes to judicial clarification or legislative changes remains to be seen.
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