Insolvency woes: Promoters take on more operating roles
MUMBAI: Promoters of some companies where insolvency and bankruptcy proceedings have been triggered are taking on operating roles to remain close to the action when the insolvency professional takes over.
Take for instance, Bhushan Steel Ltd, one of the 12 companies which the Reserve bank of India has identified for triggering the insolvency and bankruptcy code. On July 5, Neeraj Singhal, its vice-chairman and managing director took on a chief executive’s role. The same day, two other directors, Rahul Sen Gupta and PK Aggarwal added executive vice-president roles to their profiles, the company said in a notice to stock exchanges.
Similarly, Era Infra Ltd, another bankruptcy candidate, said its MD Hem Singh Bharana was given additional charge as chief executive officer to supervise and manage the operations of the company, in a July 3 notice.
“Before the board is suspended, companies are looking to strengthen executive management to assist the IRP (insolvency resolution professional) in managing the affairs of the company during the resolution process,” said Kumar Saurabh Singh, partner at law firm Khaitan and Co. “Considering the early stage of development of the insolvency market in India, this may be an Indian version of creditor in possession model to avoid disruption and preserve value of the distressed unit.”
Under the insolvency code, the resolution professional gets management control and the board is suspended during the resolution process. However, the timebound nature means the resolution professional may be hamstrung in making large scale personnel changes.
Bhushan Steel and Era Infra spokespeople didn’t respond to calls and text messages seeking comment.
Such action isn’t without precedence. As Mint reported on June 30, two board members of Amtek Auto, vice-chairman and managing director John Ernest Flintham, and independent and non-executive director Sanjiv Bhasin, stepped down on 23 June, only to return the following day in the operational role of company presidents.
Some experts argue that such a move by promoters could lead to a conflict of interest.
“Having promoters stay on the executive role may be important to maintain the going concern of the company under Insolvency Resolution. At the same time, it may cross the thin line of conflict in the resolution process,” said Rakesh Nangia, managing partner, Nangia & Co LLP, which does some insolvency work. “Alternatively, instead of giving a decision making role after IRP takes over, the promoters could be given the role of an advisor, counsellor, consultant or similar position in helping the IRP in the management of the company.”