It is rather unfortunate the manner in which the Videocon Group’s resolution process has repeatedly been highlighted as a “take-over bid” and “a plan to buy”. Not only does this lend an unfair illegitimacy to a time-bound statutory process, it also betrays a blinkered view of the Insolvency and Bankruptcy Code, 2016 (IBC)1, one that is far removed from the actuality of a “corporate insolvency resolution process” (CIRP).
To put the record straight, a duly approved resolution plan must in no manner by anyone, least of all those in the knowhow, be construed as a “take-over bid”. To put things in perspective, as per the IBC a resolution plan is presented before the committee of creditors (CoC) by a resolution applicant. Thereafter the said plan is examined threadbare by the CoC and is approved by a minimum statutory threshold if it appears feasible, viable and capable of addressing the causes of default in a time-bound manner. Furthermore, the resolution applicant who has presented the said plan must also lay down the manner of repayment of dues to the admitted creditors and if such repayment is unacceptable to the committee comprised of such creditors then it is liable to be rejected. Clearly thus, the CIRP by its very nature is an exercise in value maximisation and discovery of the beleaguered debtor and to refer to it pejoratively as a “take-over bid” is a gross misappreciation of that exercise.
The din surrounding “maximisation of value” vis-à-vis the CIRP essentially fails to account for the fact that it is a lender/creditor led exercise primed towards the true market-driven value discovery of a defaulting debtor concern which, in a vast majority of circumstances, also leads to maximisation of the corporate debtor’s worth. The detractors further err in appreciating that the only alternative to a corporate debtor’s resolution is its liquidation. Basic economic understanding dictates that value maximisation of the assets of a beleaguered debtor concern is only possible if the same is revived as a going concern rather than stripping it for parts and liquidating it.
In effect the Supreme Court is also in agreement with what has been laid out herein and has time and again concluded that liquidation is to be availed of as a last resort. The entire scheme of the IBC defers commercial decisions to the insight and perception of the CoC. In doing so the IBC has also outlined certain safeguards providing that any such resolution plan must
(a) make priority payment to operational creditors over financial creditors;
(b) make payment to dissenting financial creditors in priority over assenting financial creditors; and
(c) ensure that such payment is not less than the liquidation value of the debtor concern.
Thus by its very mandate, the IBC ensures that CIRP does not result in liquidation being seemingly more lucrative for the creditors than resolution of the corporate debtor as a going concern.
Take for instance the Videocon Group insolvency that has created such a chasm in opinions. Solely from the information available in public domain, it is discernible that the value of the plan submitted by the resolution applicant i.e. Twin Star Technologies, amounts to Rs 2962 crores whereas the liquidation value was determined by the CoC at Rs 2568.13 crores. Evidently even at a haircut of more than 95%, the creditors thereof stand to gain far more via resolution of the debtor concern than it being liquidated. It has widely been reported that the “heart of the matter” vis-à-vis the injunction granted by the National Company Law Appellate Tribunal (NCLAT) pertains to the 95% haircut taken by the creditors which is in effect a misstatement. The fact remains that the appellant Bank of Maharashtra being a dissenting financial creditor has objected to the deferred manner of payment under the approved resolution plan and has attacked the plan praying for upfront cash outgo in its favour. Though the appeal may result in the CoC considering the plan afresh, it does not in any manner draw a negative inference unto the approved value of the plan submitted by the resolution applicant as above.
Corporate insolvency and resolution processes across the world, and so too in India with the coming in of the IBC, must necessarily remain time-bound, for with passage of time the asset valuation of the debtor depletes and deteriorates exponentially. Therefore legislative mandate or not, this is precisely the reason that CIRP stakeholders aim at concluding the same as swiftly as possible. Though theoretically it may result in exclusion of resolution plans of greater value, it is a risk the creditors are more than willing to incur for the downsides of a prolonged CIRP dwarf any perceived profits.
It is no one’s case that the IBC is flawless in its current embodiment, especially when it comes to insolvencies concerning housing projects and homebuyers. However, in cases of pure corporate insolvencies where the larger interest lies in avoiding liquidation, the fact that a viable and feasible resolution plan as would allow the debtor concern to stay alive as a going concern is in itself a redemption of the IBC. In that regard “value maximisation” in terms of the total admitted claims is akin to a process of recovery rather than resolution and must not be conflated with what the Preamble of the IBC states. The very fact that the CIRP mechanism has been triggered points to fundamental fallacies in the running of any such corporate debtor and if all of its creditors try to recover their respective pounds of flesh it would not amount to resolution in terms of the IBC. Therefore, I must reiterate that recovery of dues was never the legislative intent of the IBC. Rather, the Code concerns itself with ensuring survival of the debtor company and avoiding a death by thousand cuts if each and every stakeholder tries to strip it for parts and sell in the open market.
It is only through such a creditor/stakeholder-driven approach that the true value of a debtor concern can be arrived at and if that leads to a 95% haircut so be it. What is important is that the days of disguised sovereign guarantee for bad debts are over and a rule-driven mechanism is in place that is improving with every subsequent resolution undertaken and every liquidation avoided.
† Advocate, Supreme Court of India. Author can be reached at firstname.lastname@example.org
†† Advocate practising at Delhi.
1 Insolvency and Bankruptcy Code, 2016. <http://www.scconline.com/DocumentLink/86F742km>.