IBC: The Tension Between Value Maximisation And Predictability
The Insolvency and Bankruptcy Code, 2016 carries multiple objectives, as outlined in its long title, including the “reorganisation and insolvency resolution” of companies “in a time bound manner for maximisation of value of assets” in “the interests of all the stakeholders”. A natural question then arises: what if there are conflicts among these seemingly divergent goals. In his article titled “The Globalisation of Insolvency Reform”, noted bankruptcy law expert Professor Jay Westbrook observes in a broader context that “it is less often acknowledged that the goal of maximisation is in significant tension with the goal of predictability.”
Still in its fifth year of existence, the Code has already witnessed a swing from one end of the spectrum where value maximisation was initially the dominant theme to the other where timeliness and procedural sanctity are inviolable. In the end, it might be that insolvency practitioners and adjudicatory authorities have to approach the objectives in a holistic manner by providing a harmonious construction.
The stereotypical conflict situation emanates as follows. During the insolvency of a company, two bidders (or, resolution applicants, to use the Code’s taxonomy) propose resolution plans. The committee of creditors, after due deliberation according to prescribed procedures, accepts the plan proposed by bidder A. This could lead to two further scenarios that emerge after the original timeline for the bidding process has lapsed. In one, the unsuccessful bidder B may revise its bid to offer a higher price than offered by bidder A. In the other, an altogether new bidder C may offer a price higher than that of bidder A.
How One Goal Gained Primacy
This issue first came to the fore in 2018 during the insolvency resolution of Binani Cement Ltd. Although Dalmia Bharat Ltd. emerged as the highest bidder, the adjudicatory authorities allowed an unsuccessful bidder, UltraTech Cement Ltd., to submit a more attractive revised bid and wrest control over the corporate debtor. The objective of value maximisation ultimately superseded the need to pay strict heed to procedure. A pertinent fact in that case, though, was that the adjudicatory authorities found Dalmia Bharat’s resolution plan discriminatory to certain creditors.
Buoyed by the rulings in the Binani Cement case, value maximisation became the battle cry for the onset of discordant bidding processes in several subsequent insolvencies, including high profiles ones such as Dewan Housing Finance Corp. In several of these cases, either the committee of creditors or the insolvency resolution professionals accepted the revised or fresh bids at a higher price well after the conclusion of the bidding period. This was justified on the ground that value maximisation is key under the Code. Moreover, proponents of such arrangements also placed reliance on rulings from the Supreme Court that restricted intervention by the adjudicatory authorities into the “commercial wisdom” of the creditors’ committee in such matters. Ultimately, the design of the Code places considerable deference to the expertise of the committee members, who are essentially financial creditors of the corporate debtor.
More recently, though, the adjudicatory authorities have begun viewing such procedural flagrances with a measure of circumspection.
Over the last year, in insolvencies relating to Ricoh India Ltd., Bindals Sponnge Industries Ltd. and Asian Colour Coated Ispat Ltd., the NCLAT has lambasted the parties for disregard of the procedural aspects of the insolvency resolution by over-emphasising value maximisation.
Restoring The Balance
A number of trends are becoming evident.
First, it is clear that value maximisation is but one of several goals of the insolvency legislation, not the whole and sole. Hence, one must consider it harmoniously with the other objectives such as the interests of various stakeholders, including possibly the other bidders in the process.
Second, deference to the commercial wisdom of the committee of creditors cannot form a subterfuge for its members to act with impunity, especially when there are material irregularities or arbitrariness in the process such as a failure to follow the principles of natural justice. In particular, considering the bid of a resolution applicant who was never originally part of the bidding, but only indicated its intention after completion of the process, would amount to a frustration of the resolution process. Such conduct would also introduce other distorted outcomes. For example, it could bring about information asymmetry because, by the time the stragglers submit, the terms of each of the original bids could be known, thereby giving them an unfair advantage.
Third, an unbridled pursuit of value maximisation would impinge upon another aim of the Code, which is the time-bound completion of the resolution process. There is already a concern regarding inordinate delays with its implementation, and the Supreme Court has repeatedly underscored that time is of the essence in insolvency. In such circumstances, an unending bidding process with a myopic focus on value maximisation would dilute the objective of timeliness. As the National Company Law Tribunal has pertinently observed in the insolvency of Asian Colour Coated Ispat, when timeliness is a requirement one must view the concept of value maximisation within the scope of the time and procedure laid down for the completion of the insolvency process, and not beyond that. Similarly, delays cannot be a justification for overturning bids already finalised.
In all, the NCLAT sought to harmonise the interpretation of the objectives of the Code and addressed some of the criticisms of elevating value maximisation to a higher-order norm that the Binani Cement case attracted. MS Sahoo, the chairperson of the Insolvency and Bankruptcy Board of India has similarly noted, it is necessary “to tread carefully while aiming to maximise the value in a corporate insolvency resolution process [as a] unidirectional approach may yield sub-optimal outcomes.”
In the insolvency of United Seamless Tubulaar Pvt., the Supreme Court of India too has forestalled a rigid approach towards value maximisation more broadly. These developments make clear that several competing goals must be considered in a wholesome fashion.
At the same time, some loose ends remain. Most of the rulings of the NCLAT in the cases discussed above follow very closely from the facts and circumstances of each case. For example, they all involve scenarios where the so-called value-maximising bidder came into the fray only after the bidding process was complete. What if one of the existing bidders alters the terms after the bidding period ends, as occurred in the Binani insolvency resolution process? Would the same principles apply? Devoid of answers to these questions, the existing rulings are shorn of more universal guidelines to which various insolvency players can adhere to ensure certainty in practice. As is often the case in matters involving the Code, it is necessary to await further guidance from the Supreme Court.
Umakanth Varottil is an Associate Professor of Law at the National University of Singapore. He specialises in company law, corporate governance and mergers and acquisitions.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.