Let There be Light

The Synergies Dooray Automotive case, the first in which a resolution plan has been approved under the new insolvency law, had all the elements of surprise, drama and confusion. This Visakhapatnam-based maker of automotive parts, garage and service station equipment owed Rs 972 crore to Edelweiss ARC, Alchemist ARC, Millennium Finance and Synergies Castings. The case first made headlines for creditors taking a haircut of more than 94 per cent as part of the debt recast. But there was more drama in store, when one of the financial creditors - Edelweiss ARC - moved the National Company Law Appellate Tribunal (NCLAT) against the National Company

Law Board's (NCLT's) decision accepting the debt recast plan. It requested the NCLAT to scrap the plan, which was approved by 90 per cent financial creditors, alleging that Synergies Casting, being a related party, did not have a voting right but transferred 93 per cent of its debt to Millennium Finance to reduce its (Edelweiss') voting share in the committee of creditors. Edelweiss ARC even accused the resolution professional in the case, Mamta Binani, the past president of the Institute of Company Secretary in India, of siding with the corporate debtor.

Though the NCLAT dismissed the plea of Edelweiss ARC, the case raised many important questions. Should creditors take such large haircuts even if it means resolution? Can the NCLT allow an arrangement between a financial creditor and a related party just before the initiation of the insolvency petition? Can a creditor question an arrangement between two creditors?

The case of Synergies Dooray, a lesser-known company, managed to grab headlines. Imagine what will happen when the 12 large cases - involving the likes of Essar, Jaypee Infratech, Bhushan Steel and ABG Shipyard, which account for 25 per cent non-performing assets, or NPAs, of banks - come up for resolution.

Out of the 12 cases, referred especially by the Reserve Bank of India, or RBI, to the NCLT, all, except Era Infra, were admitted for insolvency proceedings in July and August.

Testing Waters

So far, only two resolution plans have been approved, that of Synergies Dooray and Chhaparia Industries Private Ltd. Nine companies have gone for liquidation. The system has been put to test, many practical issues are coming up, and difficult questions are being raised. How these are tackled would shape the insolvency and bankruptcy system in the country.

For example, one question worrying many is use of the law by operational creditors, vendors and suppliers as a recovery tool. Of the 373 insolvency cases admitted, 175 have been filed by operational creditors, 121 by financial creditors and 77 by corporate debtors themselves. And these are just cases that have been admitted. Hundreds of insolvency cases were settled before being admitted by the NCLT. Shiju PV, Partner, India Law, says 250 cases were settled before admission in the Mumbai NCLT alone. "This is a clear example of operational creditors using this law to recover dues," says Shiju. This, say many, can mean nuisance for businesses, as any supplier or vendor with over `1 lakh (the threshold amount under the insolvency law) due can approach the NCLT and drag even a profitable, non-defaulting company into insolvency proceedings.

"Imagine a listed company, which for some reason has an amount due to a vendor, being dragged into insolvency proceedings. It could bring down its share price," says Manoj K. Singh of law firm Singh & Associates. Singh is representing Era Infrastructure, one of the big 12 defaulters referred by the RBI for insolvency proceedings, in the NCLT. He says there should be a bankruptcy test before the initiation of insolvency proceedings.

For example, Consolidated Construction Consortium Ltd filed an insolvency petition at the NCLT against VA Tech Wabag, a listed company with 2016/17 profit of `74 crore and debt of `120 crore (debt/equity ratio of 0.15 per cent), as the latter owed it `1.5 crore. The dispute was settled before the NCLT admitted the case. VA Tech Wabag agreed to pay the amount.

However, not everyone is complaining. Mamta Binani, an insolvency professional who drafted the first resolution plan to be approved by the NCLT in the Synergies Dooray case, says she would advise operational creditors, who are mostly SMEs and are not looked after well, to take full benefit of this law even if it is not a recovery law.

One question the NCLT has not been able to resolve is whether insolvency proceedings can be initiated against a company undergoing winding-up proceedings. In case of Era Infrastructure, insolvency proceedings are yet to be initiated (the case has been pending for admission before the NCLT since June) in the face of winding-up proceedings started by 18 companies pending before the high court. So far, NCLT benches across the country have taken different views on this.

But the Jaypee Infratech case has posed the most challenging question yet - whether flat buyers who paid advance money but did not get their flats can be considered as creditors. "While courts have maintained that flat buyers' interest is paramount, the code doesn't have a provision that concurs with the observation," says Niranjan Hiranandani, founder and MD, Hiranandani Construction Pvt Ltd.

To protect the interests of home buyers, the Supreme Court has asked Jaypee Infratech's parent, Jaiprakash Associates, to deposit `2,000 crore by October 27. Meanwhile, the Insolvency and Bankruptcy Board of India, the insolvency regulator, said a resolution plan should include a statement as to how it has dealt with the interests of stakeholders other than those of financial and operational creditors and of the corporate debtor.

Abir Roy, partner, Lakshmikumaran & Sridharan Attorneys, says the flat owners' claim cannot be necessarily resolved through insolvency law. It's a different issue, he says.

Financial creditors, banks, ARCs and NBFCs, are treading with caution. Abhishek Chanda, deputy manager, law department, Axis Bank, says the strategy that the creditors must adopt is that they should have a draft resolution plan before they initiate proceeding against a corporate debtor. "It would take the Insolvency professional a month to form the committee of creditors, and the resolution plan has to be submitted at least a month before the completion of 180 days. So effectively, one gets only four months in which one has to prepare a resolution plan else the company goes for liquidation unless an extension of 90 days is granted by the NCLT. Therefore, it is essential that one triggers the  insolvency process once there is a tentative resolution plan."

Regulatory Realities

Corporate debtors and creditors are bound by other laws and regulators too. These may prove to be a hurdle in effective functioning of the insolvency law. While some regulators are changing to be in harmony with the insolvency law, others may unwittingly be creating problems. Speaking at a conference on the insolvency and bankruptcy law in New Delhi recently, Raman Aggarwal, Senior Vice President and Head, Corporate Affairs, Srei Equipment Finance, an NBFC, pointed out the RBI direction in June this year that banks set aside 50 per cent loan amount as likely losses for all NPA accounts against which it has initiated insolvency proceedings and 100 per cent for loans to companies that have gone for liquidation. He says such high provisioning requirements discourage banks from seeking redressal through the insolvency route.

Anil Goel, an insolvency professional and Chairman, AAA Insolvency Professional LLP, explains how the new Real Estate (Regulation and Development) Act (RERA) is coming in the way of resolution in the case of Amrapali Infrastructure, a real estate company. "Amrapali has 17 under-construction projects. They did not comply with many rules as they were facing financial problems. Now, if I want to sell, I can't, because these are not RERA-compliant flats. Even in completed projects, if we go for registration, we can't, because there are compliance issues. In the absence of such registration, I can't sell," says Goel, whose AAA Insolvency Professional is the resolution professional in the Amrapali case. He says he will request the NCLT to exempt them from RERA so that they can sell the flats and the company continues as a going concern.

Interim Finance

Interim finance that insolvency professionals are required to raise to meet corporate debtor's working capital needs is a crucial part of resolution professionals' work. But they are facing problems as banks, unable to recover existing loans, are reluctant to give further money to these defaulting companies. This puts resolution professionals, who are supposed to run the company during the resolution period when promoters' and directors' rights are suspended, under tremendous pressure.

"Some private equity funds are coming forward to extend interim finance to companies under insolvency proceedings, but they are charging very high interest rates, often in high teens, for such loans despite the fact that claims of interim finance providers have priority over claims of financial creditors," says Binani.

Looking Ahead

As more insolvency applications reach the NCLT, the system would be tested both for its ability to stand the flow of cases given its limited infrastructure (there are only 12 benches of NCLT in the country) and discharge the cases within the time frame of 180 days.

There is another 'moral issue facing the system. Anil Goel of AAA Insolvency Professionals elaborates: "Will the public, media and opposition sit quietly if, under a resolution plan, promoters of a corporate debtor with `45,000 crore debt are given back the reins of the company after banks take, say, a 50 per cent haircut? Will there be no hue and cry over the issue? Is the government ready to face such uncomfortable questions in future, especially when bigger defaulters come in for resolution?" He says to avoid such situations, the government must ensure that such distressed companies, once they are out of insolvency proceedings, go to a different promoter.

@dipak_mondal