NATIONAL COMPANY FLAW TRIBUNAL

Experts praised it. Former Finance Minister Arun Jaitley gloated over its achievements. Several entrepreneurs hailed its efforts. But when one examines the intricacies of its decisions to resolve the recoveries of huge debts owned by India Inc to financial, corporate, and other creditors, the National Company Law Tribunal (NCLT) seems to have largely failed. This is especially true in the cases, where the debt was huge, and the names involved were big, and publicly known. The law became flawed.

Almost all the big cases—including most of the 12 pinpointed by the Reserve Bank of India (RBI) as crucial and important—were mired in complications, controversies, conflicts, or confusion. In a few, there was a hint of indirect coercion on the country’s investigating authorities, and the lower courts. What’s more important is that some cases unravelled themselves in such a manner that the solution, i.e. “resolution” as the NCLT puts it, turned out to be temporary, and the entire process began again.

It was, but logical, that given this environment, there were allegations of corruption and favouritism. A few issues were raised in Parliament, but the officials denied them. However, the clouds of corrupt opaqueness continue to hover. This is due to the huge hair-raising haircuts, i.e. the creditors agreeing to accept a miniscule percentage of their total claims from the new owners. Add to this the occasions when the creditors accepted a payment that was the same as the “liquidation value, or the lowest possible amount, and one gets an idea of what is possibly wrong with the NCLT.

Bank chairpersons, especially the heads of public sector ones, have emerged as the new power-base to dole out favours, and accept bids that may be extremely favourable to the new buyers of high-debt companies. Since these banks are largely owned by the government, there is a feeling that NCLT has become a new way of crony capitalism

Bank chairpersons, especially the heads of public sector ones, have emerged as the new power-base to dole out favours, and accept bids that may be extremely favourable to the new buyers of high-debt companies. Since these banks are largely owned by the government, there is a feeling that NCLT has become a new way of crony capitalism – instead of favourable loans and corporate debt restructuring, just reduce the quantum of existing loans by a huge percentage, and hand over the firms to loyalist industrialists.

In her Budget 2019 speech, Finance Minister Nirmala Sitharaman said that the Insolvency and Bankruptcy Code (I&BC), which led to the formation of NCLT, led to loan recovery of Rs. 400,000 crore, and banks’ bad loans fell by Rs. 100,000 crore in the past year. However, as we analyse the various resolutions under the Code, we find that the banks and, hence, the taxpayers, took a huge loss at the expense of the new buyers. The banks and all of us lost our hard-earned money saved in our bank accounts.

BEFORE we delve into the individual cases, and specific issues, let’s explore if the tribunal adheres to the philosophy of the I&BC, under which it was established. The law defines the “resolution” as an attempt to maintain the corporate debtor “as a going concern”. This implies that any plan has to ensure that the company makes enough money “to stay afloat or avoid bankruptcy”. Hence, a resolution, according to a website, “is not a sale, or an auction, or a recovery (of debt) or liquidation”. Its foundation lies not in the means, but only in the end, i.e. a going concern.

This is why the Code says that any plan, according to the website quoted above, “should maximise the value of assets of the corporate debtor, and should promote entrepreneurship, availability of credit, and balance the interests of all the shareholders”. Clearly, the aim is make sure that a company that is deemed by its creditors to be insolvent, given its inability to pay its loans, is able to continue operations under a new management. If insolvency leads to bankruptcy and liquidation, the objective is lost.AS in March 2019, as per data released by the Insolvency and Bankruptcy Board of India (IBBI), only 13.14% of the “closed” cases had resolution plans. They were taken over by the new owners to continue operations. Liquidation was ordered in 53% of the cases. The Board justified this by saying that 75% of the liquidated firms, i.e. 283 out of 378, “were with BIFR (sick) or defunct”. This implies that the number of the non-sick firms that were revived 13.14%), was lower than those that were liquidated (13.25%, or a quarter of 53%).

Surprisingly, there were cases where “resolved” became “unresolved”. The process began afresh in the case of at least two debtors, Amtek Auto, and AdhunikMetaliks. The reason: the new owners reneged on their payments

However, this urge to make efforts to retain the status of the companies as “going concerns” led to contradictions. In the case of Jyoti Structures, the original liquidation decision of the Committee of Creditors (CoC), which is formed to take the decision on the resolution before it is approved, was changed. It was directed to take a second look at a fresh bid that was submitted by a group of investors led by Sharad Sanghi. The reason, apart from the maximisation of the value of assets, was that Jyoti Structures was part of the RBI’s 12 companies, which had to have “mandatory resolution”.In the case of Binani Cement, 99.43% of the CoC approved a plan submitted by Sanjay Dalmia-controlled Rajputana Properties. Later, when 10.53% (the percentages are calculated according to the debt owed to each creditor) of the CoC protested that they were being discriminated, the NCLT asked the CoC to entertain a revised bid by Ultratech Cement. This was despite the fact that CoC hadn’t even considered Ultratech Cement’s initial offer because it was “an email with an offer”, it wasn’t made as per the “process document”, and the offer was “beyond the time limit stipulated under the I&B Code”.HOWEVER, the National Company Law Appellate Tribunal, which looks at appeals and reviews of the NCLT’s decisions, upheld Ultratech cement’s revised bid for three reasons. One, the CoC decision to approve Rajputana Properties’ offer “failed to safeguard the interest of the shareholders of the Corporate Debtor (Binani Cement). Two, the CoC erred as the Ultratech Cement’s bid “had taken care of the maximisation of the assets”. Finally, it balanced the “claims of all the stakeholders” of Binani Cement. In the end, the CoC accepted the Ultratech cement’s offer.Surprisingly, there were cases where “resolved” became “unresolved”. The process began afresh in the case of at least two debtors, Amtek Auto, and AdhunikMetaliks. The reason: the new owners reneged on their payments. The UK-based Liberty House failed to pay the upfront payment of Rs. 410 crore for AdhunikMetaliks. This was because of two reasons. One, it had not received approval from the stock exchanges to issue new shares, as was agreed in the plan. Two, the asset was not “clean” and free from litigation, as a creditor, MSTC, a state-owned company, had legally opposed it.Liberty House was also in the eye of the storm in the case of Amtek Auto, when the former failed to submit a bank guarantee of Rs. 100 crore, as was required. The CoC approached the NCLT to cancel the offer. While maintaining a deadline, the NCLT ruled, “The CoC can now either call for fresh bids or look at other applicants who had bid in the first round of the resolution process.” Liberty House alleged that there were “misrepresentation of facts” in this case, and there were “discrepancies in valuation of the stressed asset”.

Since the philosophy of the I&BC is to enable the creditors to receive as much of the money that they can, and still ensure that the debtor company continues its operations, the key to any resolution is the haircut that the former will accept on their loans. The reason: a new owner will only agree to pay a part of the loan and, therefore, the banks, and public and private financial institutions need to agree to an overall discount. This is an area that has proved to be extremely controversial.

Haircuts in several instances were huge, and hair-raising. Take the case of Synergies Dooray Automotive, where the financial creditors agreed to receive 5.65% of the nearly Rs. 1,000-crore loans. The new owner of Orissa Manganese and Minerals similarly agreed to pay Rs. 310 crore out of a total outstanding loan of Rs. 5,389 crore, or 5.75%. In the case of Kamineni Steel, which owed Rs. 1,500 crore, the realisable percentage was 26%. The initially accepted offer for Amtek Auto, which was later cancelled, was for a payment of Rs. 4,334 crore out of a loan amount of Rs. 12,605 crore, or 35%.Several experts question such whopping discounts on the loans. They contend that this is akin to giving large benefits to the new private owners at the expense of the lenders, mostly public sector banks, which mop up deposits from the public. Hence, apart from being a loss to the state, it is a burden on the citizens. If this is the way forward for the bad loans in the private sector, why shouldn’t the public sector firms be disinvested in a similar fashion, where the government as the majority owner will take a beating?

Obviously, in the case of the public sector, the government will face allegations that it sold the “family jewels”, or highly-valuable companies, for a song. So, shouldn’t the same logic be applied to the private sector since many of the companies being “resolved” are not bankrupt or sick, but only stressed since they cannot repay the huge loans? Why should the private sector receive such largesse? Isn’t it better to dole out such haircut sops to the public sector, which too are built with the hard-earned taxpayers’ money?However, the IBBI justifies the I&BC and NCLT. In its January-March 2019 newsletter, it explains, “Till March 2019, realisation by FCs (financial creditors) in comparison to liquidation value (the amount that would be earned if the company was liquidated) in respect of the CD (corporate debtor) is 194%, while the realisation by them in comparison to their claims is 43%.” In effect, it contends that although the overall haircuts were a massive 67%, the amounts realised was higher than what the creditors would have received if there were no resolutions, and no new owners.This is where there is tremendous confusion. Although the liquidation values are determined by independent professionals, there are huge discrepancies. In the case of Kohinoor GTNL, for example, the liquidation value was 12.8% of the total claims of Rs. 2,579 crore. Shockingly, the amount realised by the creditors was a whopping Rs. 2,254 crore, or over 87% of the overall claims, and a crazy seven times the liquidation value. In the case of Bhushan Steel, which was one of the largest debtors with total claims of Rs. 57,500 crore, the respective percentages were 64%, and two-and-a-half times.

At the same time, there were cases, which were even more bizarre. According to the IBBI data, the liquidation value in the case of Binani Cement was less than a third of the total claims of Rs. 7,200 crore. The total value realised by the financial creditors and operational ones was almost 100%, or Rs. 7,100 crore, of the claims. In several companies with huge debts of over Rs. 1,000 crore each, the liquidation values were extremely low, and the amounts realised were almost the same as the former. Hence, there were substantial differences between total claims, liquidation values, and amounts realised.Ever since the I&BC came into existence in 2016, there are hints that it may be above the official investigating agencies, and the various high courts in its status. This is evident from several orders of the NCLT, and its appellate tribunal. An order under the Code said that any attachment of properties and bank accounts by agencies like the Enforcement Directorate will be unfrozen since the assets to be resolved by NCLT have to be “clean”, and free from any limitations, restrictions, and legal disputes.WHEN one of the former directors of Bhushan Steel approached the Punjab and Haryana High Court, and complained that the copy of the resolution plan were not provided to the former directors. The High Court asked the NCLT to take a “fresh decision” on the matter. When the CoC approached the NCLAT, the latter said that a high court cannot intervene in such matters. The implicit issue was that the NCLT has to decide the various cases on “merit in accordance with law uninfluenced by any order except the decision of this Appellate Tribunal and the Hon’ble Supreme Court”.Clearly, there are a lot of grey, even black, areas in the operations of the I&B Code, NCLT, and NCLAT. One can fairly say that the laws need to evolve over a period of time. But there is a need for urgency as companies that may be worth much more are being handed over to the new owners with little transparency, and at huge haircuts. We, as taxpayers, are the real losers.

Alam Srinivas

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Alam Srinivas is a business journalist with almost four decades of experience and has written for the Times of India, bbc.com, India Today, Outlook, and San Jose Mercury News. He has written Storms in the Sea Wind, IPL and Inside Story, Women of Vision (Nine Business Leaders in Conversation with Alam Srinivas),Cricket Czars: Two Men Who Changed the Gentleman's Game, The Indian Consumer: One Billion Myths, One Billion Realities . He can be reached at editor@gfilesindia.com

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