An auctioneer at an auction of broodmares. (Photographer: Patrick Hamilton/Bloomberg)

IBC: Why Resolution Plans Are Unsuited To An Auction According To India’s Insolvency Regulator IBBI’s Sahoo

Last week international metals company Liberty House won what many thought was a losing battle. The National Company Law Tribunal permitted it to submit an insolvency resolution plan for Bhushan Steel & Power Ltd, well after the bid deadline, set by the resolution professional, had passed. Now it may better Tata Steel who so far had the winning bid.

Liberty House’s win has boosted hopes of many other losing bidders, like UltraTech Cement.

In the case of Binani Cement, bidder UltraTech Cement is fighting to get its revised resolution plan accepted by the committee of creditors in an effort to best current winner Dalmia Bharat.

A flurry of late and revised bids could hurt a winning feature of the IBC - strict deadlines. Of upto 270 days to complete the insolvency resolution plan.

Electronic auctions are a better way of settling the bidding process, suggested Seshagiri Rao, joint managing director and group CFO of JSW Steel Ltd. His company has also been in the race for a few insolvent assets. “Otherwise anybody can come even in the last minute and submit a bid and then say this bid is superior,” he said in a recent interview to BloombergQuint.

But MS Sahoo, the chairman of regulatory body, the Insolvency and Bankruptcy Board of India, doesn’t quite agree.

He made two distinctions. That these are not bids they are plans. And plans are not suited to an auction process.

The resolution plan is expected to address the root cause of the failure of the firm, Sahoo said to BloombergQuint. “The resolution plan can require change in technology, business model, management, product portfolio and it may also require rewriting the debt, equity or corporate finance part. So, this is not just bidding which is commonly understood but it is a resolution plan.”

It’s a point Sahoo emphasised more than once in the interview. That’s why the government forewent its first right to claim dues and why financial creditors have been given the privilege to make the final decision, he explained.

Some might argue that most resolution plans have so far been assessed by lenders on the basis of the haircut proposed to various categories of creditors. But Sahoo disagreed with any approach that reduced a resolution plan to just a set of numbers stacked up in an auction.

To me, this (auction) is not optimum utilisation of the code. We want the resolution to be sustainable. If we just pay out the dues of just one set of stakeholders and satisfy them but do not look at a sustainable resolution, then the code does not serve the purpose.
MS Sahoo, Chairman, IBBI

And yet that leaves unresolved the problem of process delays due to late and revised bids. This will be standardized over a period of time, Sahoo insisted, adding that best practices will develop and get sanctified by the courts.

Watch MS Sahoo, Chairman, IBBI in conversation with Menaka Doshi...

How do you assess the number of cases being resolved under the insolvency and bankruptcy code at NCLTs across the country? Is the disposal of these cases happening as per plan and desired speed?

I am absolutely happy with the progress in implementation of the IBC. One way to look at it is the lingua franca of commercial and financial people - they no more use the words CDR, SDR, S4A, JLF, BIFR, SICA. Now they are very liberal in using the terms like IBC, COC, IP, IRP, CIRP, haircut,moratorium. So, now the language of commercial and financial people has been changed and that is one way to look at how far we have moved.

In terms of numbers, we have about 700 corporate debtors undergoing insolvency resolution. Of them, about 100 have completed the first phase which means they have been closed either on approval of successful resolution plan or issue of a liquidation order. Another 50-60 have been closed,either of review or an appeal by a higher authority. The rest of the transactions are ongoing. We have 1,700 insolvency professionals, three insolvency professional agency and one information utility.

Another component which is very critical to this resolution process is the profession of valuers. The work has started, the rules have been notified to develop and regulate the profession of valuers. The central government has delegated the responsibility of registering and regulating the valuers under the Companies Act to the IBBI. Three registered valuers organisations have already been registered with IBBI. An examination for the registered valuers has also commenced. So, this is where we stand as regard to progress in IBC.

Ten benches with a combined 26 judges and technical staff are hearing more than 2,500 insolvency cases. According to one estimate India will need 80 benches just for insolvency cases. Are we going to be inundated?

I believe this is a proactive law. That means that this brings behavioral changes on the part of all stakeholders, the corporate debtor, directors, shareholders, equity holders and even the bankers. Now, the corporate debtor (promoter) knows well that once it defaults, for whatever reason, the likelihood of his continuing with the corporate debtor (company) is much less for the simple reason that it may not be able to submit a competitive bid and still succeed in retaining the form. To me, the best use of this code is actually not using it at all.

Everybody should take enough care much before, so that they do not end up in a predicament of going through a resolution process. So, I do not feel there will be a deluge of cases going forward.

As regard to performance, so far we all know the track of the adjudicating authority over last one and a half years. 700 insolvencies have been admitted. Three times of that has been dismissed on various grounds, which means about 2,100 other applications have been disposed of. Those 2,100 plus 700 is a total of about 3,000 matters by NCLT have been disposed of in over the last one year. So, I do not see constraints in terms of capacity of NCLT to dispose of the matters in a reasonable time.

Further, when we started the process in the initial days, there was lack of clarity on many matters. A new law had come in, people didn’t have experience. Naturally, they took different perspectives on different issues. All this is sorted out now. The admission stage started in the first quarter of 2017. At that time we found people going to NCLT, high court, supreme court. But today those admission related matters have been fairly streamlined. All contentious issues are settled, and admission process has become smooth.

So, going forward processes at NLCT will get smoothened. The number of transactions the NLCT has handled over last 1.5 years is the confidence that they have the capacity to dispose of the matters. In any case, the behavior of people will change in the long run.

Now with the new stressed asset regulations that RBI has put into place, several more cases might end up in NCLT.

The cases emanating from the banking segment or on the directions of RBI are at best in hundreds. So, this is just an addition of another 100 to the entire work flow. For the NLCT, whether it is a big or small case, the effort on the part of the NCLT is more or less same. I am not ruling out the need for having a little more additional capacity. But we are not reached a situation where things have stopped.

In several cases courts have now decided to deduct the litigation period from the 270 days deadline laid down in the code. Strict deadlines was a winning feature of the IBC. That stands threatened now by delays in insolvency resolution?

As I gave you the example of admission stage, today that process has become smooth. Similarly, we are now passing through the approval stage and given the provisions in Section 29A and given the steps involved, it is not unusual to seek the intervention of the NCLT and higher courts to sort out the matters. But this round of cases, as we pass through, almost all issues will be settled. The process for future will be completely streamlined. That means that for a matter coming up one year henceforth, approval would not require the time of NCLT and would not require excluding the time spent on the court process.

“In a sense, this is the time that the NCLT and the judiciary is making an investment to sort out the matters so that the future transactions are streamlined and become smooth.”

As far as the current situation, the law initially envisaged that the corporate debtors wil have different levels of complications. In some categories, a fast track mechanism was provided were resolution is possible in 90 days. In normal cases, 180 days were allowed. But it was anticipated that there could be very big, more complicated cases which may need, for some unforeseeable circumstances, another additional 90 days.

So, now we have 270 days for complicated cases. When for the first time these matters are going through the court process naturally courts will take some time to apply their mind. It is not the judiciary or tribunal is extending the time indiscriminately. It is only in deserving cases they have allowed exclusion, and only for that much time that has gone in court processes. For 30-50 days. And it has not happened in every case, it has happened in 2-3 cases. So, I think, allowing additional 30-50 days as a one time measure in initial days is not a matter for concern.

A second issue is whether bidders are honouring the bid deadline laid down by the resolution professional. Some are not. Will IBBI step in to ensure these bid timelines are strictly followed?

I will touch on two aspects here. One is, it is not infact a bid. This is a law for the insolvency resolution of a corporate debtor, for maximisation of the value of its assets. This is what is written in the long title of the IBC.

If a corporate has, for whatever reason, failed to repay its dues in time then it means it has not been able to perform at its most competitive level. It could be because of competition, innovation, there could be rare instances of mala fide designs, there could be liquidity mismatch issue, there could be faulty execution. So, the law expects that the committee of creditors will invite resolution plans from resolution applicants. The resolution plan is expected to address the root cause of the failure of the firm. The resolution plan can require change in technology, business model, management, product portfolio and it may also require rewriting the debt, equity or corporate finance part. So, this is not just bidding as is commonly understood but it is a resolution plan.

Second aspect, the corporate insolvency resolution plan (CIRP) today has laid down timelines for various processes. It says that by the 105th day the committee of creditors must identify the resolution applicants. It also gives further intermediate timelines and says the committee of creditors must approve the resolution plan on the 165th day unless a different timeline is provided by the adjudicating authority. So, there are timelines for various processes as part of CIRP.

This is a genuine and growing problem. There already are a couple of cases where plans have been submitted or revised after the deadline laid down by the resolution professional. And now those situations are being litigated. This needs to get standardised or else it will become a chronic source of delays.

This will be standardised over a period of time. Best practices will develop but we should not come in the way of development of practices. Let the practices happen and let it get sanctified by adjudicating authority and when time comes I will also respond.

Some bidders or resolution applicants argue that a revised bid, if it offers an opportunity for value maximisation by lenders, should be considered seriously - whether submitted within the deadline or outside it. There’s also the suggestion of accepting bids via an open or online auction. How do you view this?

The law requires the value maximisation of the corporate debtor. It does not say value maximisation of a set of stakeholders. It is a resolution plan and not a bidding or auction mechanism, which will come if the company does not go through resolution successfully and it gets into liquidation. At that stage, there is provision for auction or bidding.

The intention at the resolution stage is not a bidding or auction it’s a resolution plan. That is why the law provides so much of support to make a resolution happen. Why does government forego its first right to claim? It does so because it expects in the process there will be resolution, company will survive, employment will continue and further protection of facilitations like IP calm period, continuation of essential services.

The committee of creditors, adjudicating authority, all these are aimed at facilitating the resolution plan and generating competitive resolution plans and improving the best resolution plan. It is not an auction mechanism. It cannot be converted to auction mechanism. That will happen at the liquidation stage.

Can there be a mechanism introduced that allows for revised bids or even several rounds of bids?

To me, this is not optimum utilisation of the code. We want the resolution to be sustainable. If we pay out the dues of just one set of stakeholders and satisfy them but do not look at it as a sustainable resolution, then the code does not serve the purpose. The resolution has to look at the asset as to what caused this state of affairs.

Otherwise, we will rewrite the rights, rewrite the dues to certain set of people and may be after a while we will go through the same steps of resolution again. To make the resolution sustainable, we should look at value creation. That is why this responsibility has been given to the financial creditors.

In fact, the Bankruptcy Law Reforms Committee, while giving this privilege to financial creditors was very conscious that the financial creditors have the ability to take business decisions, to create value, to generate competitive resolution plans and ultimately approve the best resolution plan that’s sustainable. And they have the ability to take the risk of postponing the repayment to themselves to future debt. Because of these two considerations, the financial creditors have been given this privilege to generate and approve a sustainable resolution plan. I don’t think such resolution plan is amenable to auction easily.

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