Insolvency Law: Bidders Can’t Cherry-Pick Assets Of Stressed Companies
Resolution plans can’t focus on selective recovery of stressed assets, says NCLT.
A recent court order is likely to impact the way resolution plans for stressed companies are being designed. The Mumbai bench of the National Company Law Tribunal held that a plan that envisages resolution of only some assets while excluding others is not acceptable.
The NCLT said so in the case of Roofit Industries that was admitted for insolvency in June last year. Its assets included land, building, commercial property, plant and machinery in Ratnagiri, Thane, Kurkhumb, Chennai, Hyderabad, Aurangabad and Silvasa. While several entities had expressed interest in the assets, a resolution plan was proposed only for the Chennai factory. The plan by Gummidipoondi Roofit Employees’ Welfare Association was presented to the NCLT for approval.
The tribunal noted that a resolution plan can’t be considered for a particular unit excluding others. So the plan submitted by the employee association can’t be accepted under the Insolvency and Bankruptcy Code, it said, directing liquidation of the company.
The definition of a resolution plan is such that in order to be eligible, a plan has to talk about the corporate debtor on a going concern basis, Anshul Jain, a partner practicing insolvency law at Luthra & Luthra, told BloombergQuint.
If a resolution plan talks only about one particular unit or undertaking and excludes others, thereby meaning that other excluded assets can be liquidated, then the plan isn’t talking about the corporate debtor on a going concern basis.Anshul Jain, Partner, Luthra & Luthra
Which means, resolution plans have to now account for all the assets of a stressed company and can't leave out anything for liquidation, he said. There are some resolution applicants in the market who were considering a takeover of only the valuable assets and leaving the rest for liquidation; such plans will have to change, Luthra said.
As part of the resolution plan it can be proposed that some assets of the corporate debtor have to be sold to generate revenue for the company but you can't cherry-pick the assets without taking into account interests of all the stakeholders, Divyanshu Pandey, a partner practicing insolvency law at JSA, said. The insolvency regulator had even amended its regulations to say that the interest of all stakeholders should be taken into account. The selective bidding of assets without resolution of a corporate debtor as a going concern doesn’t fulfill this criteria, he said.