(Source: BloombergQuint)

Amtek Auto’s Insolvency: Buyers’ Remorse Or Buyers Misguided?

It’s been 18 months since Amtek Auto, part of the dirty dozen, went into insolvency. Soon after, bankruptcy proceedings were initiated against its three subsidiaries—Castex Technologies, Metalyst Forgings and ARGL—as well. The revival prospects for all four seemed encouraging after international business group Liberty House emerged as the winning bidder for Amtek Auto, Castex Technologies and ARGL and U.S.-based financial investor Deccan Value claimed Metalyst Forgings. But if the developments in the last two months are to go by, the finish line seems nowhere in sight.

This, because both Liberty House and Deccan Value are now contesting the information that became the basis of their bid. Meanwhile, the resolution professional, Dinkar Venkatasubramanian, is arguing that the bidders are dragging their feet in closing the deal.

Bidders’ Arguments

The resolution plan for Amtek Auto was approved by the Chandigarh bench of the National Company Law Tribunal in July this year. In October, Liberty House met with Amtek Auto’s Committee of Creditors (CoC) and pointed out “serious issues in the information” shared by the resolution professional. The meeting was followed by two letters, reviewed by BloombergQuint, detailing these issues:

  • Incorrectness in the valuation shared as part of information memorandum.
  • Significant adjustments in the audited financial statements.
  • Significant differences between data shared as part of virtual data room and reality.
  • Impact of high inter-dependencies of other group companies which, one, become essential to be acquired to revive Amtek Auto and two, lead to unsustainable valuation for the whole business.
  • Impact of material claims, being contested before the National Company Law Appellate Tribunal, against Amtek Auto which not only adversely impact valuation but also create uncertainty around further claims that may follow.

In the Metalyst Forgings case, Deccan Value has gone a step ahead and is seeking a withdrawal of its resolution plan which was approved by the CoC in August this year. It is arguing misrepresentations and suppression of information by the resolution professional. A copy of Deccan Value’s application to the NCLT has been reviewed by BloombergQuint.

It states that:

  • The production capacity shared post bid approval was far less compared to the information provided earlier. The 2016 capacity assessment report by Mott Macdonald India, which was shared by the resolution professional during the due diligence process, had indicated production volume of 210,747 million tonnes per annum. But during site visits in September, after Deccan Value’s plan was approved, the resolution professional’s team communicated that the realistic production volume is only 66,000 MTPA.
  • The CoC had appointed SP Chopra to conduct a forensic and transaction audit. The audit extended to related party dealings, preferential transactions, loan write-offs etc. This report was filed with the NCLT in August but not shared with Deccan Value, the application states. The non-disclosure of the forensic report will have serious repercussions on the foundation of the resolution plan and its successful implementation, it adds.

Resolution Professional’s Arguments

In his response to Liberty House, BloombergQuint has viewed that letter, the resolution professional pointed to a clause in the Process Note that states: a resolution plan, once submitted, cannot be amended by the applicant i.e. Liberty House. The plan can only be amended or modified, the clause says, to meet the requirements of the CoC. Once approved, the plan is binding on the applicant.

Venkatasubramanian’s response to Deccan Value was similar.

The application filed by him in the NCLT states that issues raised by Deccan Value were subject matter of due diligence before the resolution plan was submitted and approved by the CoC.

He also points out that, as per the Process Note, bidders or resolution applicants were required to carry out their own diligence and were not allowed to assume accuracy of any information made available by the resolution professional, as it was intended only for reference and not reliance. The note also made every resolution plan irrevocable and binding and Deccan Value, after having participated in the process, is bound by these terms. As for Deccan Value’s argument on production data, the NCLT application points to the Process Note which specified that the resolution professional or the CoC cannot be held responsible for the accuracy of information provided in the virtual data room.

Venkatasubramanian’s application also refers to letters by the CoC to Deccan Value which state that the process was run in an extremely fair and transparent manner.

And since the Insolvency and Bankruptcy Code doesn’t contemplate withdrawal of a resolution plan after it’s approved by the CoC, Deccan Value’s application cannot be entertained.

So, What’s Next?

While the arguments in Amtek Auto, Castex Tehnologies and Metalyst Forgings are underway, NCLT Delhi’s decision this month in ARGL’s case may set a precedent for the remaining three. To be clear, the arguments in ARGL, as recorded in the NCLT order, are quite different from what’s being argued in the other three cases. But the fact that the NCLT has upheld the sanctity of the Process Note may weigh in favour of the resolution professional in the other three cases.

The point of contention in ARGL was whether Liberty House is bound to furnish a performance bank guarantee within ten days of the issuance of the letter of intent. Liberty House had argued that the CoC and resolution professional’s insistence on the bank guarantee was illegal. The resolution professional had stated that Liberty House was dragging its feet.

The NCLT accepted this argument and held that the Process Note, as agreed to by Liberty House, mandated submission of performance guarantee worth Rs 60 crores after it was selected as the winning bidder and a letter of intent issued. Non-submission of performance guarantee, as per the Process Note, will make the plan non-responsive and the resolution professional would be entitled to reject the resolution plan. The NCLT has upheld this clause of the note.

Having succeeded in the resolution plan, the somersault taken by Liberty House put the whole insolvency process and the machinery to quandary. Such an unsavoury stance of Liberty House would only attract adverse comments from any fair-minded person, particularly when there is no justifiable reason for Liberty House to drag its feet.
NCLT Order, ARGL’s Case

And though the condition of performance guarantee has been relaxed by the CoC, Liberty House has refused to proceed with the resolution plan, the NCLT order points out.

“Viewed in that light, the bona fide of Liberty House becomes doubtful.” - NCLT

An Independent View

The objective of the code is resolution in a time-bound manner for maximisation of value of assets and the code recognises the melting ice cube analogy - the longer you wait, the more water (or value) you will lose, Sudipta Routh, an insolvency partner at IndusLaw explained. If a resolution applicant causes the meltdown despite the procedural safeguards and prescribed timelines, that could mean trouble, he added. And as for the resolution professional, he has to be grossly negligent and in dereliction of a clearly identified statutory duty for such allegations to stick.

Can the resolution professional be sued for breach of warranty, misrepresentation and so forth, causing a resolution plan to be misconceived? Not really. In the EU, bidders are given one week to come up with a plan and they aren’t given any warranty. Such an offer could be hugely discounted because you don’t know what the liabilities could be. Once the court accepts the bid, you can’t argue misrepresentation of facts. Similarly, in the U.K., you can’t proceed against the administrator for such reasons,
Sudipta Routh, Partner, IndusLaw

The insolvency code provides for imprisonment and fine as penal consequences when any entity, on whom the resolution plan is binding, wilfully contravenes it.

The other issue for resolution applicants who fail to implement an approved plan, is damage to reputation. ‘If you are a serious player in the stressed asset acquisition game, lenders have institutional memory and they won’t forget this easily,’ Routh said.

In ARGL’s case, the NCLT imposed a cost of Rs 1 lakh on Liberty House and allowed the resolution professional to cancel its plan.

The latest development in these cases is that, as per a stock exchange filing, the resolution professional has filed a similar application in the Amtek Auto matter, seeking permission of the NCLT to identify new resolution applicants for the company.