(Source: Bloomberg)

Insolvency Code: Resolution Professionals Up Against Promoter Resistance And Creditor Mindset

In the 10 months since the Insolvency and Bankruptcy Code has been in force, more than a 1,000 individuals have been registered as resolution professionals.

Once appointed, RPs take over control of the company with the objective of protecting its assets and business operations. But in doing so, they are facing issues on three fronts – friction with management or promoters of the company, challenges related to creditors and painful processes. BloombergQuint spoke with three resolution professionals to better understand the situation.

Managing The Management

From infrastructure to aviation to poultry farms, Anil Kohli of ARCK Resolution Professionals has been appointed as an interim resolution professional at MOR Farms and Kalptaru Alloys and as resolution professional at Tirupati Infraprojects, SR Foils, Maxtech Oil and Summit Aviation. Kohli pointed out that just getting the requisite information from erstwhile managements can become a herculean task.

In each and every case, including those where I replaced the interim resolution professional, there was no information provided by the corporate debtor. The interim professional could not even take custody of the assets. I was brought in and I explained to the corporate debtor if he does not agree to comply by these orders, he will be in contempt of court as the law requires the corporate debtor and all other persons to comply with the directions of the insolvency professional.
Anil Kohli, Partner, ARCK Resolution Professionals

Vikram Bajaj of Renaissance Capital Advisors has had a similar experience. Bajaj is the resolution professional at Chhaparia Industries – the second company to have its debt-recast plan approved by the NCLT. He is also engaged at Swadisht Oils and BJN Hotels. For him, convincing promoters that they are no longer in control has been the toughest part.

For the first time in India, there is a regime where control is moving from their hands and that’s the paradigm shift. So there is resistance. They will say that since they have already appealed the proceedings and the matter is sub-judice, they won’t let you do anything; otherwise their appeal will become infructuous. There is resistance regarding sharing of information, its quantum and veracity. And when you’re receiving all the claims from creditors and information regarding books of accounts is withheld, how do you verify those claims?
Vikram Bajaj, Founder, Renaissance Capital Advisors

The unwelcoming behaviour towards resolution professionals isn’t limited to the management; it’s trickling down to employees too. That’s been the experience of Sanjeev Ahuja tasked with the revival of MBL Infrastructure.

On one hand there is hostility where insolvency professionals have not been allowed to enter the premises and denial of information; thereby creating a suffocating environment for a stranger. On the other hand, loyalties continue to be with the promoters and erstwhile managements. Employees have been working with them for long and also, they don’t know what this law means. Somebody tells them that powers of the board are suspended and here is a guy, a stranger, who will call the shots. But then they also hear in the same breath that it’s a matter of six months and once things are back to normal, the promoter will be back in power. So, they can’t displease him nor can they do anything against me.
Sanjeev Ahuja, Director, Ensemble Resolution Professionals

Creditor Challenges

The troubles of resolution professionals don’t just end with erstwhile promoters, management and employees. Dealing with operational and financial creditors is proving to be a challenge too.

Once an insolvency application is accepted by the NCLT, an interim resolution professional takes over. Among other things expected of an interim professional in the first 30 days is calling for claims from operational and financial creditors and verifying them. Bajaj explained that resolution professionals are having to settle inter-creditor disputes as well.

Let’s say there is a funding for acquisition of specific machineries. Now the entire loan document does not speak of what that machinery is. And then there are other lenders that have charge on these machineries as a block of plant and machinery. Specific charges will always prevail over non-specific charges but you don’t have a description of those machineries –  how do you identify them from machineries that have specific charge over them?
Vikram Bajaj, Founder, Renaissance Capital Advisors

There are also instances where a financial creditor claims that they have a second charge but the first charge holder has never ceded that charge - there is no such communication but he corporate debtor has created the charge and the financial creditor is claiming the charge, he added.

The mindset of creditors is an additional roadblock, according to Ahuja.

If I’m able to source funds, for instance from a sale of asset which is not required or through a transaction, that can be used for operations, queries were raised as to why can’t this money be used to reduce exposure of the banks. Now that’s very difficult to explain to banks that this is the time that the oxygen is badly required. The concept is that creditors would be in control but you’ve to ensure that the oxygen supply continues. There’s a big difference from debtors in position earlier to creditors in control but this has been stretched too far.
Sanjeev Ahuja, Director, Ensemble Resolution Professional 

Additionally, the law says certain actions can’t be taken without the approval of the Committee of Creditors but some creditors expect all actions should be brought to their notice and require their approval which is not practical, he said.

Experts quoted in this story also pointed out that creditors are picking resolution professionals based on the fees they charge and turning a blind eye to the lack of experience and resources they come with. Others are sending those representatives to the Committee of Creditors who are not authorised to take decisions which, in turn, stretches the timelines prescribed under the insolvency code.

Process Pains

Besides friction with management and creditors, the challenges are two-fold – the shorter timeframe and lack of understanding of the insolvency code.

Kohli said it’s not easy to complete the entire process within 30 days at the interim stage - to prepare the information memorandum, take over custody and management etc.

You need at least 10-15 days to just take control of the person behind the corporate debtor company, that is, the promoter. Something like valuation is an issue where you have to study assets. In one of my matters, there are helicopters. For helicopters, you need to have a specialised valuer. So, you have to trace the valuer but you’re given only seven days to complete that process. So, some of the timelines are very stringent.
Anil Kohli, Partner, ARCK Resolution Professionals

The lack of understanding of the insolvency code poses its own set of issues. Bajaj recounts that for his very first case, he got a mandate from the Committee of Creditors to open a new bank account but his efforts to do so outlived the resolution process itself.

Incidentally, I didn’t have any banker on the committee of creditors but only asset reconstruction companies. Now in the first 180 days, I could get the resolution plan approved by the NCLT but I could not open a bank account because there is a different understanding that bankers have of a resolution by the Committee of Creditors; they only want a board resolution to open the account. They will only accept a director’s signature on the account opening papers and after taking 4-5 months, they reverted saying that since the company has exposure to accounts that are bad and since board resolution is not in a proper format, the account cannot be opened.
Vikram Bajaj, Founder, Renaissance Capital Advisors

The issues pointed out by these resolution professionals speak volumes about the much-required change in approach of promoters and creditors towards this new law.

Watch the full discussion with Sanjeev Ahuja, Anil Kohli and Vikram Bajaj on challenges faced by insolvency resolution professionals.