Unfair game

The RCap case brings to the fore the conflict between value maximisation and insolvency process sanctity

NCLAT, Reliance Capital
The NCLAT has recently given its nod to another round of bidding for bankrupt Reliance Capital. (IE)

The criticism about how the corporate insolvency resolution process (CIRP) is resulting in abysmally low levels of recovery has led to an absurd situation where maximising value is taking precedence over procedure. There is no denying that creditors have a right to maximise value from the insolvency process, but it can’t be at the cost of the sanctity of the process. We have seen instances of new buyers being allowed to try their luck after a winner has been declared and late applications have been accepted by the tribunals. The National Company Law Appellate Tribunal (NCLAT) has recently given its nod to another round of bidding for bankrupt Reliance Capital, regardless of the fact that, in the previous round, the Torrent Group emerged winner.

IndusInd International Holdings (IIHL), a Hinduja Group company, gave an offer of Rs 9,000 crore, but only after the auction process had ended. However, the appellate tribunal overruled the National Company Law Tribunal (NCLT), which had held that lenders to the financial services firm could not invite fresh bids. The NCLT had noted that extending the challenge mechanism amounted to violating insolvency regulations under Section 39(1A) of the CIRP. But the higher authority has ruled otherwise, and the case has now found its way to the Supreme Court. Unless, the apex court overrules the NCLAT, it looks like there is another round of bidding in the offing. The Insolvency and Bankruptcy Code (IBC) is a relatively new piece of legislation and has seen several amendments. Unfortunately, the existing rules are now being allowed to be bent on the ground that value maximisation is indeed the end goal. In this case, lenders would get at least an additional Rs 360 crore if Hinduja group’s bid is considered. The point, however, is that it is patently unfair that a party that has been declared a winner should be deprived of its rightful prize. Also, in this case, the Hinduja Group company had the benefit of knowing the value of the final bid—Rs 8,640 crore—and was able to top that by quoting Rs 9,000 crore.

In an environment where blame is often apportioned without any adequate knowledge or reasoning, lenders would legitimately justify the decision on the ground that they do not want to face questions on why they didn’t accept the higher offer from the Hindujas. One cannot also rule out harassment of the bankers concerned. Understandably, bankers have chosen to play safe as most business houses have tremendous political clout. They are trying to recover as much of the dues as possible and letting the courts decide on whether the rules are being broken or not.

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Unfortunately, they may actually end up losing money because every day’s delay costs them. It is possible that the losses incurred by them on the interest until the resolution plan is finally approved and implemented, could outweigh the benefits of the additional Rs 360 crore they will earn. Unless the fresh round of auctions throws up a significantly higher price, the effort may not have been worth it. Lenders need to be protected so that they can take the right decisions without fear of punishment. This must be built into the law. Also, we need more uniformity across benches so that precedents can be cited to speed up the process. The resolution process can’t become a forum for a bidding war or a forum for hostile takeovers. The sanctity of the process must be preserved.

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First published on: 11-03-2023 at 04:30 IST
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