‘It Might Hurt Genuine Bidders,’ Says Top Lawyer Cyril Shroff On IBC Ordinance
Has the IBC ordinance gone too far? Top lawyer Cyril Shroff believes so.
While acknowledging the underlying political message to promoters of insolvent companies, Cyril Shroff, top lawyer and managing partner of law firm Cyril Amarchand Mangaldas, said the IBC ordinance may hurt commercial outcomes and needs better drafting.
The ordinance was promulgated by the President of India on Thursday, a day after the Union Cabinet approved the effort to bar promoters of insolvent companies from submitting resolution plans.
The government’s media statement was clear in saying that the ordinance was to “prevent unscrupulous, undesirable persons from misusing or vitiating the provisions of the Insolvency and Bankruptcy Code”. But in doing so it may have gone too far, said Shroff.
Watch the full conversation with Cyril Shroff here:
Here are edited excerpts from the conversation.
The promoters have a window of opportunity, if they are able to pay the overdues then they can still participate in the bidding process and submit resolution plan. Do you think that is enough?
Let me comment on three things. One is, the political consciousness and political message surrounding this. Second is, on the commercial aspects. Third is the unintended consequences.
As far as the political positioning, it sounds right because there is an atmosphere in the country about defaulting promoters being bad guys. Because they are bad guys they should not be allowed to take any benefit from this process because they could land up getting the assets cheap or banks incurring some losses and the end state with the promoter being back in the saddle. It is from an emotional, public opinion perspective, it sounds right. Even though this is unusual in comparison with other insolvency regimes across the world. So, it is a bit of an Indian extension taken in light of the fact that Indian businesses are promoter-controlled. So, that’s the political messaging. The other narrative is why should they not [bid] as long as they are participating with anybody else.
On the commercial aspects, you are taking out one of the serious contenders. The more you limit number of participants, the price discovery could be lower. This you have to trade off with moral hazard of promoters being allowed to come in.
Let’s get to the unintended consequences. This is still an early reading of the ordinance. There is lot of reflection and fineprint reading which needs to be done. In the enthusiasm to expand and be comprehensive about the list of people who could be disqualified from participating, it has gone so far that you may land up hitting what could have been genuine, independent bidders because they might have connection with people who could be tainted in this perspective. I don’t think that has been properly thought through. And it will pose practical challenges. There is a fine balance between being comprehensive and having footprint of disqualification that could include people you never intended to cover. That could be the second problem. On the list of disqualifications, that could be a part of the unintended consequences theme, there are areas which should have been clarified.
Coming to the point on the window of opportunity, it can be found in the new clause Section 29 (A) (C). It’s an exception to the disqualification where there is a reference to failure to make payment of all overdue amounts with interest thereon and charges related to the non-performing asset. So what is unclear is whether this cure applies to the asset which is the subject matter of insolvency at the NCLT or is it some other asset. Are you disqualifying a resolution applicant who has a problem somewhere else in his group or are you disqualifying the entity which is the subject matter in question. So, this requires some clarification.
I don’t see a logic in...if somebody were to show up with a check at the door, whether it is the company itself or the promoter and says here is the money, why should they be disqualified? It serves the purpose of price discovery, getting lenders their dues and you have solved the problem with the threat of this process.
Does this still leave the scope open for two promoters of two different projects bidding for each other’s projects?
There is drafting problem which needs to be clarified. The intention needs to be clear as to who you are trying to disqualify. Are you trying to disqualify anybody who has an NPA or are you disqualifying the promoter in that particular case? These questions will arise. The effort is for the practitioners in this areas to get as much clarity as possible. Ambiguity is enemy of clarity here and we need extreme clarity in the bankruptcy regime as any ambiguity could lead to a challenge in court. Until the ambiguity comes from the legislation or the regulator, we have to interpret it as we go along.
For an honest promoter who is not allowed to participate in bidding process, what are the legal options he has? Do you see a protracted legal battle of promoter challenging the ordinance or the banks? Is this process at risk?
There could be many grumpy faces with this ordinance. Yes, somebody is likely to challenge it. It would be perceived as a bit high handed because in one blow you have barred potentially an honest promoter from coming back. This does not make a distinction between an honest defaulter and not so honest defaulter. There is a wide list of categories which include the whole kitchen sink.
Creditors see this as a positive in terms of credit culture. But they may see lower recoveries from some of these assets. Which of those two arguments would you buy into in the current scenario?
it is clear from the preamble of ordinance that the imperative of this was the political and moral hazard issue and not commercial considerations. So, it gets a tick on the public opinion, moral hazard, political messaging. But it does complicate it. I am in favour of a clear efficient bankruptcy regime. I am a great believer in the new code. But given how complex this area is and with so many stakeholders being involved, it had to be tempered by not only clarity but nuance balancing of interest and there are parts of this which get overboard.
All of these assets have gone through several months of efforts by JLFs or lenders. If they have not been successful to restructure then, if they are not able to take advantage of the window of hope and pay the overdues. If both opportunities have been missed, would you still consider the promoter an actual, potential bidder?
That will depend upon whether it is a bid which is a promise to pay in the future or is it a bid with cash on the table. If the cash on the table is there, then why does it matter whether in the past he was able to produce it or not.
But we are giving one opportunity to pay the overdues?
It’s human psychology. At this stage, the desperation levels will be higher because it is now within their visibility that this asset may be lost to them forever. So, with the level of desperation at an inflection point, I think the motivation to find the money will be greater. The plane is taking off and this is the last chance and then the door shuts, but you can make a dash with your cheque book and land.
How long you are going to delay the plane?
That is not anybody’s choice because timelines in bankruptcy code are pretty clear. The plane will leave when it has to leave. But is there a last chance or not and what is the last chance? There is an element of pragmatism and fairness in it.