Bank NPAs crisis: Will IBC be a success? First resolution plan throws up points to ponder

Published: September 23, 2017 5:01:46 AM

The underlying objective of the IBC (Insolvency and Bankruptcy Code) is to revive and restore a company or liquidate it.

IBC, Insolvency and Bankruptcy code, Company, Bank NPAsThe underlying objective of the IBC (Insolvency and Bankruptcy Code) is to revive and restore a company or liquidate it.(Representative Image: IE)

The underlying objective of the IBC (Insolvency and Bankruptcy Code) is to revive and restore a company or liquidate it. The first insolvency plan approved by the National Company Law Tribunal (NCLT) in the  Synergies Dooray case, has thrown up some key legal and financial issues. These need to be monitored as they would determine whether the IBC is a success. Among the key observations of NCLT is that proceedings before it are summary proceedings and, in effect, the NCLT cannot examine the aspect of mens rea and see whether the provisions of the IBC have been complied with in the true spirit.  The creditors included Edelweiss Alchemist Asset, MFL (Millennium Finance Limited) and SCL (Synergies Castings Limited). Edelweiss challenged the resolution process, arguing principally that despite being one of the largest financial creditors of Synergies Dooray, its voting rights in the committee of creditors came down drastically because of an assignment agreement entered between SCL and MFL with the alleged ulterior motive of reducing the voting share of Edelweiss.

The IBC provides that a related party to whom a corporate debtor owes a financial debt shall not have any right to representation or vote in a meeting of committee of creditors. Thus, Edelweiss’s principle challenge was that SCL being a related party to Synergies Dooray, would not have any right to vote and it entered into an alleged mala fide assignment agreement with MFL to transfer all its debts and reduce the voting share of Edelweiss in the committee of creditors. It was further argued that since the debts have been assigned by SCL to MFL, MFL should also be considered as related party for the purpose of IBC.  The NCLT dismissed Edelweiss’ claims and noted that the resolution process adopted by the RP (resolution professional) complied with provisions of the IBC and the assignment agreement was entered following the process of law.

The Tribunal also made some interesting observations wherein it noted that proceedings before it, under the IBC, are summary proceedings. Thus, the aspect of mens rea cannot be raised before it in an IBC proceeding. It further noted Edelweiss has no locus standi to question the various rights which accrued to MFL under the assignment agreement of which it was not a part of.  Another interesting observation was that the entire assignment of debts between SCL and MFL can be said to be similar to tax planning rather than tax avoidance. In effect, NCLT has blessed such arrangements between the creditors. However, NCLT, while allowing the resolution plan, passed a direction in relation to payments between SCL and MFL asking them to establish the bona fide nature of the transaction between SCL and MFL.

The claims of the financial creditors qua the corporate debtor, i.e., Synergies Dooray, were: Alchemist Asset (Rs 122.06 crore), Edelweiss (Rs 86.92 crore), MFL (Rs 673.91 crore) and SCL (Rs 89.26 crore). While the RP came up with a resolution plan which was approved by 90% of the creditors, the following were the payment amounts to the financial creditors: Alchemist (Rs 6.86 crore), Edelweiss (Rs 4.89 crore) and Millenium Finance (Rs 37.91 crore). These payments are to be made over a period of three years.  Indian companies are generally promoter-driven and the buy-in of the promoters, in the entire resolution process, may become key. Since the vote-share is based on value of debt, there can be situations wherein the promoter company/related-party transfers a large portion of its debt to a financial creditor with the intent of participating in the creditors meeting while subverting the embargo of the related party put in by the IBC.

The resolution plan approved by the committee of creditors of Synergies Dooray was that the payment to operational creditors would be made on a staggered basis post the completion of payment to the financial creditors. Per contra, the NCLT, while approving the resolution plan, noted the debt owed to operational creditors should be paid first before making payments to other financial creditors considering the quantum of debts involved.  This decision is interesting. An operational creditor does not form part of the committee of creditors (except in a rare case where the corporate debtor does not have any financial creditor). It is plausible that the committee takes care of its interests first before considering the interests of other creditors. There may be cases where an operational creditor had initiated the action under Section 9 of the IBC but is not a part of the resolution plan. The issue of whether operational creditor is a necessary and proper party in a resolution process will also be tested in the future.

In a resolution plan they are assured of repayments not less than the amount they would have received had the company gone into liquidation under the waterfall mechanism provided under Section 53 of the Act.  The NCLT also noted that the minority creditor cannot super impose or scuttle the process of entire resolution plan. The jurisprudence of the minority creditor in the IBC process will evolve over time especially in cases when the genuineness of the transaction between creditors is called into question. The key issues would be: does NCLT have the power to look into transactions between creditors especially when under the IBC, the NCLT can only look at questions of priorities or any question of law or facts arising out of insolvency resolution and not any issue emanating from an inter se agreement between the creditors? What is the nature of proceedings before NCLT and NCLAT in an IBC proceeding?

Can a creditor assail an arrangement between creditors of which it is not a party of, even if it is affected by such arrangement? Can the NCLT/NCLAT look into transaction which involves a related/group company and lift the corporate veil, if required?  In this case, the lenders had to take a staggering haircut of more than 90% on their original outstanding amount. While resolution and restructuring is the key, one must watch to see whether creditors see value in any corporate debtors, especially in cases where the RBI has directed the banks to approach NCLT to resolve the pending dues from loan defaulters to allay the NPA situation. Some of the loans to the said corporate debtors may have turned non-performing despite previous restructuring.

Written by Abir Roy

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