The new responsibilities vested in the resolution professionals will check promoter malfeasance, could help recoveries
There is no doubt the corporate insolvency resolution process (CIRP) hasn’t quite lived up to expectations. Although the Insolvency and Bankruptcy Code is an excellent piece of legislation, the insolvency process has been hobbled by delays and litigation, and has resulted in lower-than-expected recoveries for lenders. While the NDA government has worked overtime to plug the loopholes, more often than not, the stressed firms have been sold at surprisingly low valuations. Indeed, at a shade under 40%, the recoveries for lenders are abysmally low. That the process could be short on checks and balances was flagged recently in the Videocon Industries Ltd (VIL) case. The Mumbai NCLT pointed out how intriguingly close the winning bid—put in by Anil Agarwal’s Twin Star Technologies—was to that of the liquidation value. The bench observed in its order, that “surprisingly, the resolution applicant also valued all the assets and liabilities of all the 13 companies and arrived at almost the same value as the registered valuers.” The tribunal requested the Insolvency and Bankruptcy Board of India (IBBI) to examine the issue in depth and to ensure the confidentiality clause was not in any way compromised, in letter or in spirit. “Even if the confidentiality clause is in existence, in view of the facts and circumstances … a doubt arises upon the confidentiality clause being in real-time use,” the bench comprising H P Chaturvedi and Ravikumar Duraisamy wrote. The NCLAT has stayed the transaction.
Meanwhile, in what seems like an attempt to make the process more transparent, the IBBI has made life a little harder for resolution professionals (RP) who must now probe transactions carried out by the promoters to check for malfeasance. For instance, RPs need to find out if a corporate debtor has carried out preferential transactions or been involved in dealings that undervalued assets; they also must check if the company undergoing insolvency proceedings has indulged in fraudulent or wrongful trading. The objective is to do a thorough check of the insolvent company’s recent transactions to detect any attempt to strip the firm of assets or cash. The IBBI, it would appear, has come across cases where the promoters of bankrupt firms have resorted to fraud or indulged in unlawful activity to the detriment of the business. The RPs may have unearthed instances of transactions that destroyed value, and this could be one reason the number of resolutions is so low. The question is whether such transactions, if found to have eroded the value of the company, can be reversed. Nonetheless the value of such exercises lies in its potential to deter promoters, in general, from such misbehaviour; they could be penalised in some manner. It is not easy to reform promoters, but we need to make a start somewhere. From now on, RPs will also be expected to look into borrowing agreements that companies have entered into to find out if there have been any “extortionate credit transactions”. It is not unusual for companies struggling with liquidity issues to get into loan agreements with lenders—including private equity firms—on unfavourable terms. This kind of indebtedness can’t hurt the sale prospects.
Indeed, creditors are getting back pitifully small amounts; Twin Star was paying Rs 2,962 crore for VIL against the admitted claims of Rs 64,838 crore, implying a haircut of of 96%. The recovery for Alok Industries, where a whopping Rs 29,523 crore was at stake, was paltry 17%. The process needs to get better.