Insolvency Litigation, High Stakes, Big Battles, Hair Cuts and Head Cuts

The Insolvency and Bankruptcy Code is slowly evolving and coming of age through hundreds of petitions being instituted in various Benches of the National Company Law Tribunal (NCLT). When the stakes involved are of thousands of crores of rupees, the competition among stakeholders becomes intense; few crores get spend on lawyers' fees, every single day.

The high-stake litigants are almost airlifting Senior Counsel of the Supreme Court in chartered flights and choppers to reach different Benches of NCLT. The intense litigation going on in NCLT, Ahmedabad Bench, between Essar Steel and Arcelor Mittal led almost all senior lawyers in the country to Ahmedabad. Mr. Mukul Rohatgi, former Attorney General, who was held up in Supreme Court till 12 o'clock was flown in chartered flight to Ahmedabad to reach there by 3 pm. Mr. Mukul Rohatgi has also appeared before NCLT, Kolkata Bench, for Ultra Tech in a highly-contested resolution process of Binani Cement.

The high-pitch legal battles with enormous financial resources at litigants' disposal enable them to test every sub-section or regulations of the Insolvency and Bankruptcy Code at different levels of judicial hierarchy. The resolution process of Binani Cement had already reached NCLAT and even the Supreme Court, and has gone back to where it originated i.e. NCLT, Kolkata Bench. The resolution process has also opened up huge business opportunities for asset reconstruction companies (ARCs). The ARCs, who have got the assignment of Non-Performing Assets (NPAs) from various public sector banks at throwaway prices, based on mere security receipts (SRs), are calling the shots in the meeting of Committee of Creditors (CoC) which is a very decisive body in the resolution process. It has become all about who manages 75 percent voting rights in the CoC as contemplated in Section 21(8) of the Code, and the ugly side of corporate democracy is manifested in the meetings of CoC of many corporate debtors. Prior to the CoC meetings, parallel private meetings are being held between financial creditors, who are members of the CoC, for canvassing 75 percent votes in the CoC. Since most of the NPAs are assigned by the banks to private ARCs, CoC meetings are virtually conducted and controlled by ARCs, against the spirit of corporate democracy.

Yet another aspect of the game is the promoters who lost the control of the company trying to get hold of the companies by infusing funds with the aid of external agencies. Once insolvency petition is admitted by operation of the Code, the management of the company will be transferred to the hands of Insolvency Professional.

To add to the vows of erstwhile promoters of the corporate debtors, the Central Government recently brought in an amendment to the Code w.e.f. 23.11.2017 inserting a new section '29A' to the Code, which makes promoters of corporate debtor ineligible to become resolution applicant. It is, may be, slightly unethical to paint all promoters equally as bad and ineligible. Of course those promoters who siphoned off the companies' money and committed fraud in the running the companies, should be kept out of the bid; but there are many who genuinely end up in debt due to market crash.

Whether the erstwhile promoters can re-enter and bid is being examined by National Company Law Appellate Tribunal ( NCLAT) in Binani case itself.  In one of the offshoot appeals arising from Binani, the NCLAT has decided to consider two important questions, "What is the intention of the legislature in allowing the (suspended) Board of Directors to attend the meeting of Committee of Creditors?" and "If any person, including the Directors or others who are otherwise ineligible under Section 29(A), offers better amount  for 'Resolution Process', can such offer be rejected on the  ground that they are ineligible, though the Code has been enacted with a view to maximise the value of assets of the  corporate person? In other words, whether Section 29 (A) is mandatory or not?"

Another interesting term, which is heard very often in insolvency proceedings, is 'haircut'.  Many members of the NCLT are former judges and judicial officers and they find fun in such terminology. "Haircut happens only in Tirupathi Balaji," one member kidded on hearing the term.

In the company resolution process, in order to arrive at a 'resolution' of the company and save the company going into liquidation, the financial creditors would opt to sacrifice (write off) a portion of their credit (exposure) otherwise payable by the corporate debtor. Such percentage of sacrifice is often described as 'haircut'. How much of 'haircut' one should go for, is another important question resonating in many NCLT Benches. When there is availability of credit, should one go for 'haircut'? Whether unsecured creditors should always be kept out, being satisfied with liquidation value? Such are the questions thrown open in many resolution proceedings. Many public sector banks agreeing for 'haircuts' despite 'availability of credits' would be another cause for worry. There should be a CAG audit of 'haircuts' to avoid many unfair transactions. The whole insolvency proceedings should not end up as erstwhile promoters buying back their own companies at lesser rate through proxy companies, renaming them as 'resolution applicants'.

The plight of unsecured creditors is another serious concern.  It would be unethical and immoral to keep out unsecured creditors all the time. There are cases in which the companies could function based on the support extended by unsecured creditors, after declaration of debt as NPA by secured creditors. Many companies had pulled off only on the basis of raw materials supplied by the unsecured creditors; but when it comes to the resolution or liquidation, they are given a raw deal. No doubt, there may be rare cases of creation of false invoices by certain unsecured creditors, but for many, non-payment becomes virtually 'head cuts', compelling them to down the shutter forever.

Independence and impartiality of 'Resolution Professional' is another issue. There are reported cases where resolution professionals make 'related parties' as the 'financial creditors' to get a berth in CoC by acknowledging assignment of debt to 'nonrelated party', after the initiation of Corporate Insolvency Resolution Process (CIRP). The 'data' of disciplinary proceedings initiated by Insolvency and Bankruptcy Board of India (IBBI) against erring resolution professionals is yet to be released. Many of them are paid employees and named lenders for big corporate institutions, and they are bound to work only for the financial interest of their employers. As the independence and impartiality of the Insolvency Professional is not secured to the hilt, the entire insolvency proceedings will lead to big time corporate frauds.

Since the resolution process is all about resolution, maximization of value of assets and availability of credits; one can expect the Insolvency and Bankruptcy Code to evolve in those lines.

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