12 March 2019: Now that two years have passed since the first major acquisitions under Insolvency and Bankruptcy Code (IBC), several players—buyers, investment bankers and dissatisfied creditors—are slowly opening up about what they see as chinks in India’s bankruptcy law.
These include repeated litigation—both during and after the process—missing physical assets in plants, the lack of judges and questions over the integrity of promoters of distressed businesses and resolution professionals.
The cracks in the resolution process are evident from the following developments:
- After acquisition of Monnet Ispat by JSW Steel Ltd in September 2018, operational creditor Bharat Heavy Electricals Ltd (BHEL) and unsecured creditor IFCI Ltd have challenged the resolution plan.
- The bidders for Amtek Auto and its unit Metalyst Forgings—London-based Liberty House and US-based hedge fund Deccan Value Investors, respectively—are challenging the information provided to them by the resolution professional during the bidding process. While Deccan Value Investors has asked NCLT to cancel its resolution plan, Liberty house has alleged in court that the contents of a forensic audit conducted by EY into Amtek Auto were not revealed to it.
“Often, resolution professionals are ill-equipped to fully oversee operations at companies. In other cases, there are serious integrity issues among resolution professionals and promoters,” an investment banker said on condition of anonymity. “We know of cases where equipment has been stolen from plants during the resolution process. In some cases, promoters litigate to draw out the resolution process while we hear of money being siphoned away from the company during this period.”
Mahesh Singh, founder and managing director, Singhi Advisors, said sometimes assets do go missing at the time of closure of the deal. “Buyers should get a chance to do the closing due diligence. Even so, there are legal remedies for when assets are missing because there is always a lag between selling a business and finally getting possession.”
Godrej Group chairman Adi Godrej said: “The bankruptcy code has been very poorly implemented because there have been so many cases of bankruptcy which have not been finalized. We allow them to go from one court to another and then we give them stay order. Our judicial process is very slow. “It (IBC) is not being implemented as well as it could have been. That is not perhaps for lack of trying but it is also our legal system and legislation.”
JSW Steel’s joint managing director, M.V.S. Seshagiri Rao said in a recent interview: “Under IBC, once a case in admitted, whatever cases are pending against a company, there is a moratorium on them. But once the resolution plan is approved, all of these spring up again. We are seeing this in several forums, in all companies that have been acquired, not just ours. I think some clarity is required here so winning bidders feel more comfortable that once the settlement is paid, everything else is extinguished.”
The major acquisitions under IBC were those of Bhushan Steel by Tata Steel Ltd; Binani Cement Ltd by UltraTech Cement Ltd; and Monnet Ispat by JSW Steel-AION Capital.
Kalpesh Kikani, managing director and senior partner, AION Capital, said at the Mint Investment Summit in Mumbai on 1 March: “First, the challenge is getting to know what the true price for the asset is. Step 2 is who gets how much among various financial creditors, be it secured, unsecured, secured with guarantee, unsecured with guarantee, and then you have some operational creditors who believe they are equal to financial creditors and others who believe they are better than financial creditors in terms of supplying (goods to a company even during distress). This Stage 2 of who gets how much is an integral part of IBC and will be the subject matter of litigation—and as a bidder this is something we always factor into our bids.”