Photographer: SeongJoon Cho/Bloomberg

IBC: How To Deal With Runaway Bidders?

Orchid Pharma Ltd., Ruchi Soya Industries Ltd., Adhunik Metaliks Ltd., Amtek Auto Ltd. and its subsidiaries all have a run-away bidder problem! The winning bidders of these insolvent companies want to backout of the process after their resolution plans have been approved.

Liberty House and Deccan Value are contesting the information that became the basis of their winning bids for Amtek Auto and Metalyst Forgings Ltd respectively. Adani-Wilmar Ltd. has cited delays in the resolution process as the reason for its disinterest. And Ingen Capital is simply refusing to pay up for Orchid Pharma.

So, what’s the fate of these insolvent companies- rebidding or liquidation? And what consequences will these bidders have to face? Bahram Vakil, founder and senior partner at AZB shared his views with BloombergQuint.

What did you make of these cases where resolution applicants are refusing to pay up? Is it a bidder-specific problem or a larger process issue?

It is very unfortunate. It hurts the process. It is a bidder-specific problem. Liberty has done this in other parts of the world as well where they have delayed right to the end. We should have done - as a country, as a group - a little more due diligence on this aspect. But we need to tighten the rules and make the penalties stiffer, so that this does not happen in the future as it is very unhelpful.

What happens to these insolvent companies? Can rebidding be allowed for them or will they necessarily head to liquidation?

Technically, you have to go for liquidation as there are no specific provisions for this kind of situation. But liquidation will not be the most effective solution in these circumstances. If there is a H2 (second highest) bidder, then as the creditors’ committee has requested in some of these cases, you can try and close a transaction with them. If there is no second bidder, then you have no choice but to restart the process.

What will be the consequences of restarting this process? Do you think it will impact the bid value?

It will depend on the commercial value of the asset and the market situation. It is very likely to have a negative impact. You have been through it once and it has failed and then people will feel it is now even more of a distress situation and take full advantage of it.

How will the timelines work- do you start the clock all over again? The model timeline prescribed by the IBBI doesn’t provide for such a situation and we don’t have any judicial precedents either.

It is something they will work out in these specific cases. It will be fact specific in each case. The creditors’ committee in some cases has requested to remove the period that was taken for the prior transaction and add the days before the final bidder was selected. It will be case specific - are you going all the way back to a new Expression of Interest, in which case you’ll have to ignore all the time that’s lapsed. Or if you are going with the second highest bidder, there will less of a delay. So, it will be fact specific.

The Insolvency Code currently provides for a fine of up to Rs 1 crore and imprisonment of up to five years if anyone, on whom the resolution plan is binding, wilfully contravenes it. Is that a powerful enough deterrent?

I am not sure whether that is strong enough. Let’s see how that plays out. There needs to a be a disqualification. I am sure that section 29 (A) will also get amended to add people who have behaved in this improper way. There are two solutions. Either you say you are disqualified, blackball for good and you will not be a bidder in future. Or you say if such a bidder bids, you have to give 100 percent bank guarantee. So, your bid is secure and there is no question of this happening again. It is up to the decision makers to make that call and how strongly they want to stamp this out and stop this from happening in the future.

Should we distinguish between resolution applicants whose plans have been approved by the NCLT versus those by the creditors’ committee?

It could be one step milder, but it should be strong enough to be a deterrent. Unless you have bona fide and just cause, it should be a very strong deterrent. Again, in that situation, you may not want a permanent blackball and disqualification, but bank guarantee requirement would have to be steep -whether you say 75-80 percent - to make sure people think twice before doing it.

What is just cause? Do you believe courts will find merit in arguments that the resolution professional provided inaccurate or inadequate information, and sympathize with these bidders?

In majority of the cases, the court will disregard such arguments. There will be no merit in these arguments.

Also read: Loan Recoveries, Resolutions Spiked After Insolvency Law, Show RBI Data