7 firms in a fix after bidders fail to implement resolution plan under IBC

At least seven companies under the Insolvency and Bankruptcy Code (IBC) are staring at a situation where preferred bidders have raised issues, or have delayed, or just expressed a desire to walk away from implementing a resolution plan. 

Three companies — Castex Technologies, ARGL, Metalyst Forgings — are subsidiaries of Amtek Auto. Amtek Auto, Castex and ARGL were won by the Liberty House group. 

In Castex, lenders filed an application with the Chandigarh Bench of the National Company Law Tribunal (NCLT) to withdraw its application that sought approval for the resolution plan after the applicant defaulted on payment of upfront money. The NCLT has issued a notice to Liberty. In the case of ARGL, the NCLT has ordered withdrawal of Liberty’s resolution plan after it refused to pay a performance bank guarantee. Sources close to Liberty, however, said that in all the cases the firm had raised issues on valuation with the NCLT. In the case of Metalyst, Deccan Value Investors has cited misrepresentation of facts. The case is being heard in the NCLT. 

While Liberty has defaulted on payment of upfront money in Adhunik Metaliks’ case, the company recently told the NCLT that it was ready with the funds to close the transaction. The matter is being heard. In yet another case, Ingen Capital, the preferred bidder for Orchid Pharma, has not paid. A lender to Orchid Pharma said the resolution professional and committee of creditors have requested for 90 more days to identifying another bidder after the chosen bidder backed out. A decision from the NCLT is awaited. 

The case of Ruchi Soya is different. Here, the bidder, Adani Wilmar, has written to the resolution professional and the creditors wanting to withdraw its offer as delays has led to deterioration in the asset’s value. Adani’s plan was yet to be approved by the NCLT.

Non-serious bidders are a cause for concern, but delays have been as much a worry for time-bound resolution of stressed assets under the IBC. So much so that the corporate affairs ministry and the Insolvency and Bankruptcy Board of India (IBBI) would take up the matter next week. “The ministry and the IBBI are concerned about cases dragging. Senior government officials have a meeting scheduled next week on the subject,” sources said.

According to Saurav Kumar, partner, IndusLaw, there is a designated time under the law and the request for proposal within which to close a deal. “From a bidder’s perspective, a price is offered for a transaction which is to be completed in 270 days. If that crosses a significant number of days beyond the designated time, the bidder should have the opportunity to walk away, subject to the delay not being on account of the bidder,” Kumar, who advises a number of resolution applicants, said.

Experts, however, said there is little clarity on the legal recourse for the committee of creditors if it feels that the bidder has not adhered to the resolution plan or if the preferred bidder withdraws before the 270-day period ends. The IBC had probably not envisaged such a situation and there are grey areas here, they said.

“It appears that this aspect has not yet been conclusively tested by the court. Hence, it would be interesting to observe as to what judicial interpretation is rendered,” said Diwakar Maheshwari, dispute resolution partner, Khaitan & Co. 

Abizer Diwanji, head of financial services, EY India, said, “There should a section like 29A under the IBC barring bidders that don’t fulfill their obligations and it should include non-IBC cases. Except in cases where approval for an application has been pending for long in courts, withdrawing a resolution application is unjustified.”

In the case of Amtek Auto, the committee of creditors has sought to bar Liberty from bidding for any insolvent company. In their application, seeking to invoke Section 74 (3) of the IBC against Liberty, the creditors said there is “lack of bonafide” intent on part of the company to follow the terms of the resolution plans approved by the adjudicating authority. Liberty, on its part, has raised questions about the valuation. Section 74 (3) says officials of successful resolution applicants can be imprisoned for a minimum period of one and a maximum of five years, and fined a minimum of Rs 100,000 with the maximum penalty of up to Rs 1 crore if they violate terms of the plan approved by the adjudicating authority.

While Section 74 might be a deterrent, the way forward is a bit of a haze. Maheshwari said, in the given context, it would be appropriate for creditors and resolution professionals to approach the NCLT to seek judicial guidance at the earliest to avoid unwarranted delays. A top lender said a direction from the NCLT would help the creditors to negotiate with the H2 bidder or invite fresh bids. 

“Such a situation is yet to come before the courts. Thus, it will be difficult to say what will be the process. That said, it should be the normal course of action for lenders and resolution professionals to approach courts and seek their guidance,” another lawyer, dealing with insolvency cases, said.
 

Sumit Binani, founder partner of KLASS Insolvency, on the other hand, said that if the 270-day timeline expires liquidation may be the only option, but the lenders could move an application for liquidation as a going concern.