INSOLVENCY AND BANKRUPTCY CODE: KEEPING PROMOTERS AT ARM’S LENGTH
Many experts feel the spirit of the Code is compromised if original promoters get back control of their distressed assets
With a dozen big-ticket insolvency resolution cases nearing the end of the moratorium of 180 days, questions are being raised on whether the existing promoters should be allowed to bid for their own assets.
The government has come up with amendments in the Insolvency and Bankruptcy Code (IBC) to state that credentials of the resolution application need to be mentioned at the time of submission of the bids. What this essentially means is promoters that have been declared wilful defaulters or have been found to have diverted funds following a forensic audit, will not be allowed to participate in the liquidation process. Legally though, promoters have the right to bid for their assets, provided the bid plan finds favour with the Committee of Creditors. Many experts, including several industry players, feel the spirit of the Code would get compromised if the original promoter gets back control of their distressed assets.
Interestingly, India is among the few countries with rules to keep promoters and the board of directors away from a company during the insolvency resolution period. International insolvency experts say developed economies, such as the US and the UK, do not have any restrictions on promoters bidding for their companies.
In fact, in many developed economies the promoter and the board of directors remain functional even during the resolution process. Sumant Batra, managing partner, Kesar Dass B & Associates, points out that the US model and UK model on insolvency and bankruptcy resolution are different from that of India. Both these jurisdictions allow the promoter of the company undergoing resolution to be part of the proceedings. In the US, the board is not dismantled. The promoter continues to run the company as a going-concern and a trustee is appointed to assist the promoter in running the company till resolution is placed for approval.
In India while on paper the promoter loses control over the company and the board is dismantled, insolvency professionals managing many of the distressed companies say they informally seek the help of the original promoter to run the business till the end of the moratorium period. One professional working on some of the big 12 cases justifies the move on the ground that the promoter has knowledge of the sector and the business dynamics, while the resolution professional, in most cases, are not sector experts.
“In the US the promoter of the company undergoing restructuring under the insolvency law is expected to submit a resolution plan,” says Batra. He adds that the insolvency law in that country requires only the unsecured creditors to form a Committee of Creditors.
In the UK, an administrator is appointed to look into the case, just as India has a resolution professional. While there is an administrator to look after the company, the promoter is not ousted, as is done in India. It is the job of the administrator to prepare the plan and bring on board the investors. The resolution plan could involve the promoter as well.
The law in Singapore allows the debtor to choose either of the two models — the US one or the UK one.
On whether letting the promoter to present a resolution plan for his own company defeats the purpose of resolution, Dinkar V, partner at E&Y feels, “The purpose is to maximise returns to stakeholders. Equally though, the promoter should be able to transparently articulate the challenges and reasons that have led the company to this point.”
Moreover, any resolution applicant, including the promoters, should provide compelling resolution plans, which are detailed and supported by realistic assumptions that underpin the future performance of the business, he adds.
Internationally, the usual practice is that any party that has lost value in insolvency, including the guarantor, will have the right to vote on the resolution to the extent of their guarantee. In most jurisdictions globally, promoters with criminal cases against them are barred from the insolvency process, say experts.
Interestingly, the IBC already had provisions to exclude wilful defaulters, insolvent entities from bidding for companies undergoing corporate resolution. Experts say the amendments to the rules require the resolution professional to apprise the Committee of Creditors with the credentials of the resolution application, at the time of putting up the plan for approval. Prior to the amendment, the resolution professional had to only ensure that wilful defaulters are not entertained at the time of asking for the bids.
It seems the Code gives the original promoter — if not a wilful defaulter or involved in fraud — a last chance to redeem themselves and their distressed business.