Why insolvency Ordinance was needed POWERPOINT

The Insolvency and Bankruptcy (Amendment) Ordinance, which has made it difficult for promoters to buy back their assets, has raised a lot of heat and dust. Most promoters impacted by the Ordinance have said it is grossly unfair to keep them away from bidding. Some lenders have expressed concerns that absence of promoters can bring down the price of the stressed assets. The logic goes like this: If assets are sold to the same promoters, haircut for banks will be less since a new investor would want a higher discount for an unknown asset. “I am willing to take a haircut, but I don’t want to go bald,” is what the head of India’s largest bank was quoted as saying.

However, the experience at three of the five small companies that managed to pass their resolution plans before the Ordinance came into effect does not make a pretty picture. Promoters have regained control in all the five companies.

Consider the case of the West Bengal Essential Commodities Supply Corp (WBECSC), which became the first state-owned enterprise to settle its dues under the Insolvency and Bankruptcy Code. In November, lenders agreed to give up the entire accumulated interest of around ~175 crore (the company’s total dues were around ~360 crore) to settle a dispute with the company.

The corporation was set up to procure food grains and to intervene to stabilise markets for essential commodities. In 2004-05, the government agency had bagged a deal to supply cement clinkers to a company in Bangladesh but the consignment was allegedly sold in the black market, causing a loss of ~30 crore to the state. The Bangladesh company had rejected the majority of the shipments citing quality issues. The shipments, however, never came back to India.

Around the same time, the state government had lost another ~200 crore because of a similar fraud in a deal to send iron ore fines to China for the 2008 Beijing Olympics. While a couple of Indian Administrative Service officers were arrested, lenders, who were initially pressing for recovery of the entire amount of dues on the strength of state guarantee for repayment, had no option but to share the cost of the series of frauds committed by the management.

Then there was the case of Synergies-Dooray Automotive, which made headlines as the first case in which the National Company Law Tribunal (NCLT) approved a resolution plan, giving the company back to the promoters. Each of these lenders took a 94 per cent haircut. Under the plan, Synergies would pay ~54 crore to its creditors of its total dues of over ~900 crore, and that, too, at attractive terms. Of the ~54 crore, ~20-odd crore would be paid upfront and the balance over five years.

In 2005, the Hyderabad-based company leased its assets to a special purpose vehicle (SPV) — Synergies Castings. Soon thereafter, Dooray’s lenders assigned their debts to this SPV. But two years later, just before Dooray filed for insolvency ( under the Sick Industrial Companies Act), Synergies Castings transferred that debt to Millennium Finance, a non-banking financial company.

Edelweiss Asset Reconstruction Company (ARC), one of Dooray’s secured creditors, objected to the insolvency process saying that the transfer of debt from Synergies Castings to Millennium Finance was questionable as it was done with the intention of influencing voting power in the committee of creditors. Though the case was dismissed, it raised quite a stink. Synergies Dooray is right in saying that it has diligently followed due processes of law and that all previous orders whether by the BIFR (Board for Industrial and Financial Reconstruction) or the NCLT have been issued in its favour, but it’s an open question whether a related party can continue to influence the outcome of the bankruptcy resolution process.

Shree Metaliks is yet another case. The National Company Law Appellate Tribunal (NCLAT) stayed the resolution plan of the company after one of the financial creditors appealed against the plan, which said that the promoters would repay the principal amount in full, but the interest payable would be waived. Srei Equipment Finance, one of the financial creditors, had challenged the plan drawn up by the promoter, and approved by the Calcutta bench of the NCLT, on the ground that it was placed by the company or the corporate debtor itself.

It argued that the plan by the corporate debtor (Sree Metaliks) is nothing but a case of erstwhile directors still acting for the corporate debtor in spite of the fact that they have been denuded of all their powers and authorities as directors of the corporate debtor.

Examples like these support the growing view that there is indeed an issue of moral hazard if defaulting promoters bid for their assets during insolvency proceedings. And, it is not necessarily true that allowing promoters to rebid for their own companies would lead to less haircuts for the lenders.