Hold up on Exit Route!

With the National Company Law Appellate Tribunal (NCLAT) staying the approval granted by the Mumbai bench of the National Company Law Tribunal (NCLT) to the resolution plan for the Videocon Group, the saga of India's first group insolvency proceeding continues.

On June 8, the NCLT approved a resolution plan submitted by Twinstar Technologies, a wholly owned Indian subsidiary of the UK based Vedanta Group. Twinstar's resolution plan provided for payment of Rs 2962 crore, which is a mere 4.15 per cent of Videocon's total admitted debt of Rs 64,838 crore, raising several concerns, ranging from the confidentiality obligations of the resolution professional to the rights of dissenting creditors. The NCLT, despite being constrained to approve and not interfere with the "commercial wisdom" of the Committee of Creditors (CoC), did not hesitate in expressing its displeasure with the resolution process.

The displeasure is justifiable. Under the IBC (Section 30(2)(b)), the resolution plan must provide for payment of debts amongst creditors in a "fair and equitable" manner. In the plan submitted by Twinstar, unsecured assenting financial creditors and operational creditors are getting a paltry 0.62 per cent and 0.72 per cent of their admitted dues. Majority of the operational creditors are MSME's and the NCLT, even while approving the plan, requested Twinstar to increase its payout to the ailing MSME's, who were themselves on the cusp of insolvency. Even the secured assenting and dissenting financial creditors had to settle for only 4.9 per cent and 4.56 per cent of their respective dues. Considering that lending by financial creditors (Banks, NBFC's etc.) entails public money, the concern that whether such resolutions are in line with the public policy of the country must not be overlooked. If an award passed in an arbitration, where no public money is involved, can be set aside if the same is contrary to the public policy of India, then why can't the same yardstick be made applicable to resolution plans?. After all the banks are repositories of public trust and money.

What is more startling than the 95.85 per cent haircut taken by the creditors, is that Twinstar's bid of Rs 2962 crore is uncannily close to the liquidation value of the Videocon Group estimated at Rs 2568 crore, thereby raising legitimate suspicion and concern on the confidentiality of the resolution process. Regulations 35(2) and 35(3) of the I&B (Insolvency Resolution of Corporate Persons) Regulations, 2016 state that the resolution professional must maintain the confidentiality of the fair market value and liquidation value of the corporate debtor and can only disclose the same to the CoC members after the resolutions plan have been submitted. Whilst the CoC members, must on receipt of the information, issue an undertaking of confidentiality, no such obligation is caste of the resolution professional. Further, Section 29(2) of the code provides that the resolution professional must disclose all "relevant information" to the resolution applicant (Twinstar in the present case) and it is for the resolution applicant to ensure compliance with confidentiality obligations. Again, there is no such duty imposed on the resolution professional. Even under Section 25 of the code which is titled "Duties of resolution professional", the specific duty to maintain confidentiality of sensitive information likely to affect the valuation of the corporate debtor is conspicuously absent. Clearly, the confidentiality rules need to be revisited, especially qua the resolution professional. The current regime does not have much deterrence value so as to ensure solemn adherence to confidentiality.

It would not be an over-reach to suggest that it is largely due to these striking findings of the NCLT that the NCLAT was compelled to stay the takeover bid. Status-quo ante has been restored until the next date of hearing by which time more than three years would have passed since the Videocon group was admitted into insolvency proceedings. This is way beyond the statutory timeline of 330 days. In case the plan is sent back to the CoC for re-consideration, it may be quite a while before curtains are finally drawn on this case. If we factor in the likely prospect of this matter reaching the Supreme Court, the wait might just get longer.

The two primary objectives of enacting the IBC were: The conclusion of the insolvency resolution process in a "time bound manner" and "maximisation of value of assets" of the corporate debtor. Videocon was one of the first test cases to examine the prospects of insolvency jurisprudence in India and the first one, for group insolvency proceedings. It was in the second list of the 26 defaulter companies referred for insolvency resolution proceedings by the RBI. However, almost four years and a 95 per cent haircut later, the call for an immediate course correction couldn't be louder.

By - Arush Khanna
Published By: The Indian Express