Insolvency resolution stumbles on 4 key issues raised by prospective buyers

With prospective buyers of stressed assets challenging the interpretation of clauses in the Insolvency and Bankruptcy Code (IBC) in four key areas, the resolution of many of them would depend on the final decisions of the National Company Law Tribunal (NCLT) or through amendments to the IBC by the government.

Experts, however, say the plethora of legal cases being filed is not unusual. They say the new law is superior to a winding-up petition which was filed by creditors under the Companies Act. The key difference is that it wasn't time-bound though an official liquidator was appointed.

A senior lawyer involved in many cases at the NCLT said: "All the decisions made by the committee of creditors (CoC), whether on the winning bid or on eligibility of competing bidders, can be challenged at the NCLT. That is what is happening now. Through these cases we expect the NCLT to clarify the law. And they have to do so within the mandatory nine months." In that case, he said there might not be a need for amendments to the IBC in many areas.

So what are the areas under scrutiny? This week, for instance, UltraTech had everyone stumped when it offered to buy the 98 per cent stake of the promoters of Binani Cement at Rs 72.66 billion, subject to the termination of insolvency proceedings.

The Aditya Birla group has contested the decision of the CoC to offer the company to Dalmia Bharat at the NCLT. It revised its offer higher than what Dalmia Bharat offered.

Experts say while the IBC states that the NCLT alone has the jurisdiction to consider "applications or proceedings by or against the corporate debtor", the preamble also says the objective is to maximise the value of the asset. Also, it does not divest the owner-debtor of its shareholding though the management of the company shifts to the resolution professional (RP).

A lawyer involved in the issue said: "If the owner-debtor is able to find a better value for her asset outside the NCLT through bipartite agreements, there is nothing in the IBC to prohibit such a transaction." Through this offer, Binani can pay off its creditors and still have money left in its balance sheet (its outstanding loan is Rs 38.84 billion).

Some experts, however, point towards a Supreme Court order setting aside NCLT admission in favour of an out-of-court settlement. Other experts say while the offer is valid and helps in maximising value, it still has to be endorsed by the NCLT to ensure that the money is mandatorily paid to the creditors by the promoters. And, there is nothing to stop the Dalmias to make a higher bid at the NCLT, either.

A clause that has come under fire is that a person is not eligible to submit a resolution plan if such a person or anyone acting jointly or in concert with him or her has been convicted for any offence punishable with imprisonment for two years or more. Again, another clause says the prohibition holds good if the conviction has taken place even outside India.

Using this clause, Renaissance Steel has challenged at the NCLT the eligibility of both Vedanta and Tata Steel for bidding for Electrosteel Steels. It has said Tata Steel UK, a subsidiary of the Indian steelmaker, is guilty of causing an industrial accident and Vedanta Resources is responsible for environment pollution in Africa. The NCLT Kolkata has asked the resolution professional to place before the CoC all objections filed by Renaissance and the NCLT order.

Lawyers say the clause needs to be clearly defined. "For infrastructure companies such cases are common because of their business and could be misused," a source said.

The third key area of contention has emanated from the clause under which wilful defaulters and defaulting promoters cannot give a resolution plan. In the case of Ruia-promoted Essar Steel, both the bidders, Numetal and ArcelorMittal, have been rejected by the CoC and asked to rebid.

However, Numetal had approached the NCLT a day earlier, apprehending that their proposal might not be considered properly. The NCLT has not stalled CoC proceedings but said the decision of the CoC meeting on Wednesday would be subject to the outcome of Numetal's application in the tribunal.

Experts say, with this move, it is possible that the eligibility criterion will now be decided and clarified by an order of the NCLT.

The fourth issue has been kicked off by Liberty House's late submission of a bid for Bhushan Power and Steel. While the resolution professional rejected the bid because it came after the deadline, Liberty House has challenged that decision in the NCLT.

Lawyers say that if maximising the value of the assets is the main issue, it would be interesting to see whether such a bid will be considered eligible even if it came late. The NCLT Delhi has stayed the insolvency proceedings to consider Liberty's plea first.

For now, as the clocks ticks it's well-nigh impossible to make it happen within the deadline.