Has India’s First Insolvency Resolution Approval Set A Dangerous Precedent?
It’s made headlines as the first case in which the National Company Law Tribunal has approved a resolution plan. But that’s not the most noteworthy feature of this judgment.
In 2005, Hyderabad-based company Synergies Dooray Automotive Ltd. leased its assets to a special purpose vehicle – Synergies Castings. Soon thereafter, Dooray’s lenders assigned their debts to this SPV. But two years later, just before Dooray filed for insolvency (under the Sick Industrial Companies Act), Synergies Castings transferred that debt to Millennium Finance, a non-banking financial company.
Edelweiss Asset Reconstruction Company (ARC), one of Dooray’s secured creditors, objected to the insolvency process saying that the transfer of debt from Synergies Castings to Millennium Finance was questionable as it was done with the intention of influencing voting power in the committee of creditors.
Edelweiss argued that since Synergies Castings was Dooray’s SPV, and hence a related party, the law did not allow for it to be included in the committee of creditors set up under the insolvency process. Hence Dooray, to ensure control over the insolvency process, had the debt transferred from Synergies Castings to Millennium Finance who got a seat in the committee of creditors.
Edelweiss petitioned the NCLT to examine the assignment of debt and the relationship between Dooray- Synergies Castings and Millennium Finance.
The National Company Law Tribunal dismissed Edelweiss’ allegations and approved the resolution plan with certain modifications.
The facts and the outcome of this case raise an important question:
One would have to apply the principles of lifting the corporate veil, especially in case where the promoter company has transferred a large debt to a group company. In such situations, if the incoming financial creditor decides to side with the promoter, it’ll be very difficult to check those situations.Sitesh Mukherjee, Partner, Trilegal
Another lawyer said, on the condition of anonymity, that nothing in the law prevents a corporate debtor from substituting a related financial creditor with a non-related party to get him on the committee of creditors. Essentially, the insolvency resolution process is a game of votes and if you can get a majority creditor, desired resolution plans and results can be achieved, he added.
One way to prevent this sort of misuse is to amend the provisions of the insolvency code to say that a lender who buys the debt at a significant discount, will have voting weightage proportionate to his buying cost and not the exposure, another insolvency law practitioner told BloombergQuint requesting anonymity. He explained this by way of an illustration. For instance, the voting weightage given to X, who buys a Rs 500 crore debt for Rs 200 crore, should be calculated based on Rs 200 crore. This will prevent transactions aimed at garnering voting power in the committee of creditors, he added.
The facts will be different in every case but on the face of it, the purpose in situations like this might be to get a majority vote in the committee of creditors and consequently get a preferable resolution plan approved by the NCLT, Mukherjee said. And so, where a corporate debtor is initiating the whole process, as was the case with Dooray, and where there are allegations like in this case, the level of scrutiny should be more by the NCLT, he added.