By Debasish Mallick & Priti Thomas
Recently, the NCLAT had dismissed the appeal of Rajputana Properties Private Ltd, originally declared as the highest bidder (H1), in the corporate insolvency resolution process (CIRP) of Binani Cement Ltd. Rajputana had earlier challenged the Adjudicating Authority’s order (being the Bench of the NCLT at Kolkata) according approval to the resolution plan of UltraTech Cement Ltd. The NCLAT judgment was upheld by the Supreme Court, in a swift hearing of the appeal. The NCLAT judgment is analytical and illuminating. It brings out the spirit of the Insolvency and Bankruptcy Code (IBC) succinctly. The legal process and arguments pursued over the last few months in this case have been keenly watched. EXIM Bank of India’s stand and arguments played a unique role in the litigation surrounding the insolvency resolution process and the NCLAT judgment established the accuracy of EXIM Bank’s convictions. This has prominently come to the fore in all discussions and judgments relating to the case, which have contributed to laying down a precedent in the evolving insolvency space in India.
Binani Cement was amongst the first cases referred under the IBC. Bank of Baroda, the lead creditor, had initiated the CIRP proceedings. Two prominent players—UltraTech and Rajputana (a company promoted by Dalmia Cements)—had bid for the distressed asset. The initial bidding process saw Rajputana submit a bid higher than that offered by UltraTech. In a quick decision, Rajputana was decided as H1. The decision forestalled scope for further negotiations with UltraTech, though in the interim UltraTech significantly improved its bid. More than the amount on offer, the quality of the two bids were vastly different. Rajputana’s bid proposed full settlement of outstanding dues of the secured financial creditors, and a select group of unsecured financial creditors (two of the unsecured financial creditors, including EXIM Bank, were not being offered full settlement of their outstanding dues). Most operational creditors were also denied full settlement of their amount in arrears. In contrast, UltraTech offered full settlement to all. As a consequence, the UltraTech offer carried a higher price tag for the asset and it was evident that the price proposed in both the bids was significantly higher than the valuation of the asset arrived at in the conventional process.
EXIM Bank’s stand
Not being the recipient of its full dues as most other unsecured creditors, EXIM Bank knew it had to defend its interest. The amount offered by Rajputana fell short of its total dues by `170 crore, which was 27.41% of its admitted claim of `620 crore. It was difficult to accept such a large haircut, particularly when other similarly-placed lenders were being offered full settlement. It was also not possible to reject the offer outright, and be a dissenting creditor, since the resolution plan entitled such dissenting creditors to a ‘nil’ settlement in case of resolution.
EXIM Bank had no preference between the two bidders. Both the bidders were prominent industry players with excellent track-record of operations. Both offered settlement amount(s) in excess of the valuation of the asset. Against the above backdrop, we, at EXIM Bank, were convinced that the case had some unique and compelling feature, and decided to launch for ourselves its discovery, based on our analysis and conviction. The principal points relied on and highlighted by EXIM Bank before various fora were:
Seriousness of the players leading to a higher price discovery: Both the bids were made by prominent and responsible industry players, and not by unconnected and/or inexperienced players. Both the bids were higher than the valuation for the asset. As such, both the bids were serious, genuine and acceptable. However, the offer price differential was to be viewed and treated as a process of price discovery. In the spirit of fairness, both the bids in their presented form(s) should be accepted, but with the caveat that the lower bidder should be afforded an opportunity, to match the higher offer.
Differential settlement amount: The two offers carried distinct settlement terms. One offered to repay dues in full to all financial creditors as well as operational creditors. The other offered to repay dues in full to a select group of lenders, leaving a set of financial creditors and almost the entire group of operational creditors in a lurch, as it denied full settlement of their dues. As such, the second offer failed to satisfy the canons of equity.
Class of creditors and settlement: EXIM Bank had submitted all through that as per the IBC, there were only two types of creditors—financial and operational.
The IBC doesn’t differentiate further amongst financial creditors. So, there should be no difference in settlement terms among financial creditors, whether secured or unsecured, in the event of a resolution. In the instant case, there was inequity created by Rajputana’s proposal that offered settlement on differential terms between unsecured financial creditors also.
Maximisation of value of assets: It was evident the increased offer at stake, from UltraTech, needed consideration in view of the fact that it held out clear positive prospects for the satisfactory resolution of the debts of all the stakeholders. This thinking was aligned with the core objective of the IBC, which emphasises the need to achieve maximisation of the value of the asset and balance interests of all the stakeholders in a resolution process.
Against the above backdrop, and in light of its convictions, EXIM Bank decided to pursue the case before the Adjudicating Authority, with a prayer for equitable and fair treatment to all, while maximising the value detected as a result of price discovery, which, in turn, assured settlement of dues in full to all the stakeholders. We are happy that the judgment has agreed with the basic tenets of our stand and cemented a new perspective to the IBC.
Mallick is deputy managing director and Thomas is deputy general manager, EXIM Bank