Can the Insolvency & Bankruptcy Code Hurt Independent Bidders?

Efforts to prevent “unscrupulous” persons from bidding in insolvency proceedings may hurt “innocent” bidders.

(Photo: The Quint)

The devil is always in the detail they say, and it couldn’t be truer in the case of the controversial ordinance promulgated to amend the Insolvency and Bankruptcy Code.

The government’s effort to “prevent unscrupulous, undesirable persons” from bidding for companies in insolvency proceedings may unwittingly encompass “independent” and “innocent” bidders as well, say lawyers. Thereby hurting price discovery and loan recovery.

Cyril Shroff, managing partner at leading law firm Cyril Amarchand Mangaldas, acknowledges the political messaging in the ordinance — that those promoters who’ve delayed loan resolution may no longer be able to hold on to their assets - but also points to unintended consequences.

In the enthusiasm to expand and be comprehensive about the list of people who could be disqualified from participating, it has gone so far that you could land up hitting what could be thought to be independent bidders because they might have a connection with people who could be tainted in this perspective. I don’t think that has been properly thought through and it will pose practical challenges.

Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

Connected Persons And Related Parties

The ordinance lists 10 ineligibility criteria and two lawyers, speaking on the condition of anonymity, say many of these target not just the promoter but other bidders as well.

For instance, the ordinance bars a promoter whose company has been classified as a non-performing asset for one year or more and who has failed to make the payment of all overdue amounts including interest and charges related to the NPA before the submission of a resolution plan.

It also bars any person “connected” to such a promoter.

The connected person definition includes a “related party”.

And under the Insolvency and Bankruptcy Code – the related party definition includes, among others

• relatives of a director of the corporate debtor
• any person who controls more than twenty percent of voting rights in the corporate debtor.

According to one lawyer this definition may snag Sajjan Jindal-promoted JSW Steel Ltd., a company that has expressed interest in more than one insolvent asset. Another disagrees. The core contention is that Sajjan Jindal is the brother of Naveen Jindal whose company Jindal Steel & Power Ltd. was recently pronounced a non-performing asset.

But it hasn’t been a NPA for a year.

Seshagiri Rao, joint managing director at JSW Steel, disagrees that his company risks being deemed ineligible. But, pointing to the over 35 promoter entities at JSW Steel, he admits his job as a bidder for any insolvent asset just got tougher.

Now I have to sit with every resolution professional and explain with detailed documentation that I don’t attract these ineligibility criteria.

Seshagiri Rao, Joint MD and Group CFO, JSW Steel

The debate may extend to global steel giant Arcelor Mittal, reportedly in the fray for more than one distressed asset.

Indian steel company Uttam Galva Ltd has been a NPA for a year or more. Arcelor Mittal is a 29 percent shareholder of the company as per the September 2017 stock exchange filing. One interpretation of the IBC suggests Arcelor Mittal is a related party of Uttam Galva and hence ineligible to submit a resolution plan.

But another lawyer points out that the related party definition under IBC pertains to a the corporate debtor and hence that may block Arcelor Mittal from participating in bids for Uttam Galva (if it comes to that) but not other distressed assets.

BloombergQuint has not been able to reach Arcelor Mittal for a comment.

To be clear, no two lawyers agree on any one interpretation involving the above two cases. But they all agree that the ordinance could do with better drafting.

Unreasonable Classification?

The lack of which has resulted in unreasonable classification, says Alok Dhir of law firm Dhir & Dhir Associates.

This is a well meaning ordinance. However the broad sweep of the criteria which has been laid down has included bonafide promoters in difficulties due to macroeconomic factors and other external factors over which they have no control and innocent relatives who are not connected with any of this and foreign investors where it is difficult to verify whether such disqualifications apply or not.  

Alok Dhir, Managing Partner, Dhir & Dhir Associates

Foreign Bidders

According to Dhir a foreign bidder may stand the risk of elimination if it has been or is connected to a NPA anywhere else in the world that has failed to repay overdues.

Promoter Swap

Can a promoter, ineligible to bid for his own asset, bid for a distressed asset not owned by him? And the owner of that second asset bid for the first one?

Shroff points to ambiguity in the main ineligibility criterion – that if all overdue amounts are paid by the promoter of an NPA he can avoid ineligibility.

It is unclear that whether this cure applies to the asset which is subject to insolvency in the NCLT case or is it some other asset? Are you disqualifying a resolution applicant who has problem somewhere else in his group or disqualifying the entity? So, this requires some clarification.  

Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

Director Disqualification

In a similar vein Dhir points to the ineligibility criteria pertaining to director disqualification.

Can a person disqualified as a director in ‘X’ company submit a resolution plan for company ‘Y’, he wonders aloud.

He cites the recent deregistration of over 2 lakh companies and subsequent disqualification of over 3 lakh directors to emphasise the unintended consequences.

These infirmities, besides reducing the pool of bidders, could result in the ordinance being liable to challenge unless rectified in the parliamentary process when being confirmed as law.

Political considerations do not necessarily make for good economic sense, Dhir concludes.

(This article was originally published on BloombergQuint and has been republished with permission.)