Mumbai: The practice of selling soured loans back to promoters or their related entities by banks, as in the case of Synergies Dooray Ltd, has left minority creditors with little choice but to accept loan recast terms that are favourable to the promoters unless the courts intervene.

While such debt sales are believed to have been discontinued by banks, industry experts say that there could be many more cases similar to Synergies Dooray.

In the case of automotive parts maker Synergies Dooray, the first case to be resolved under the new Insolvency and Bankruptcy Code (IBC), minority creditors have accused promoters of gaming the system by buying out bad loans.

Challenging Synergies Dooray’s approved resolution plan in the National Company Law Appellate Tribunal (NCLAT), Edelweiss Asset Reconstruction Co., a minority creditor, has accused Synergies Castings Ltd, a related party of Synergies Dooray, of first acquiring loans given to its parent from various creditors and then transferring them to a legally non-related party, Millennium Finance Ltd, which Edelweiss alleges is acting as a proxy for the promoters.

Edelweiss’s petition says that the transfer of Synergies Dooray’s loans to Millennium Finance just days before the bankruptcy proceedings were to begin, was done to dodge IBC regulations which strip promoters and related parties of voting rights.

Synergies Dooray’s debt resolution plan, approved in August by all creditors except Edelweiss, approved a 94% haircut and settled for an upfront payment of less than half of the outstanding.

NCLT filings show that out of Synergies Dooray’s seven original lenders, IDBI Bank, State Bank of India, Indian Overseas Bank and Andhra Bank had assigned their share of the Synergies Dooray’s loans directly to SCL for a minor consideration. Notably, the banks during that time had the option to extinguish their share of loans through a potential one-time settlement but they chose to sell the loans to Synergies Castings. Among Synergies Dooray’s other lenders ICICI Bank Ltd sold its loan to Asset Reconstruction Co. (India) Ltd, which in turn assigned it to Synergies Castings while Exim Bank sold its loan to Edelweiss in 2014. HSBC Holdings Plc.’s India unit sold its loan to JPMorgan Chase & Co.’s India unit, which later sold it to Alchemist Asset Reconstruction Co. Ltd (AARC).

In the final tally between 2008- 2011, Synergies Castings had bought more than 75% of secured loans of Synergies Dooray.

Queries sent to IDBI Bank, Indian Overseas Bank and Andhra Bank seeking details of the circumstances preceding the sale of debt to SCL did not elicit a response till press time.

A spokesperson for State bank of India said “It is a policy of the Bank not to comment upon individual accounts and it’s treatment."

Requests for comment sent to Millennium Finance, ICICI Bank and AARC also remained unanswered till the time of going to the press.

An Synergies Dooray spokesperson said: “We have diligently followed due processes of law. All previous orders whether by BIFR (Board for Industrial and Financial Reconstruction) or NCLT have been issued in our favour and we continue to have faith in the judiciary/Indian legal system."

The outcome of the Synergies Dooray case will decide whether a related party can continue to influence the outcome of the bankruptcy resolution process.

“The banks were well within their rights to explore any means to recover their loans and I see no harm in their decision to sell to related entities" said Madhukar Umarji a former executive director at the Reserve Bank of India. “But whether such related party can become member of creditors committee is a separate issue."

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