There is no doubt that the Corporate Insolvency Resolution (CIRP) process did not quite live up to expectations. Although the Insolvency and Bankruptcy Code is an excellent piece of legislation, the insolvency process has been hampered by delays and litigation, and resulted in lower than expected collections for lenders. While the NDA government has been working overtime to fill in the gaps, more often than not, struggling companies have been sold at surprisingly low valuations. Indeed, at a shade below 40%, recoveries for lenders are extremely low. The fact that the process may lack checks and balances was recently pointed out in the Videocon Industries Ltd (VIL) case. The Mumbai NCLT highlighted how the winning bid, presented by Twin Star Technologies of Anil Agarwal, was eerily close to that of the liquidation value. The court observed in its order that “surprisingly, the resolution plaintiff also assessed all the assets and liabilities of all 13 companies and came to almost the same value as the registered appraisers.” The court asked the Insolvency and Bankruptcy Board of India (IBBI) to look into the matter thoroughly and ensure that the confidentiality clause was in no way compromised, in letter or in spirit. “Even if the confidentiality clause exists, in view of the facts and the circumstances … a doubt arises as to the real-time use of the confidentiality clause”, wrote the bench composed of HP Chaturvedi and Ravikumar Duraisamy. NCLAT suspended the transaction.
Meanwhile, in what appears to be an attempt to make the process more transparent, the IBBI has made life a little more difficult for resolution professionals (PRs) who must now investigate transactions made by promoters for check for embezzlement. For example, PRs need to find out whether a debtor firm has made preferential transactions or has been involved in transactions that have undervalued assets; they must also verify whether the company which is the subject of bankruptcy proceedings has engaged in fraudulent or unlawful transactions. The goal is to do a thorough check of the insolvent firm’s recent transactions to detect any attempt to strip the firm of assets or cash. The IBBI, it seems, has come across cases where promoters of failed businesses have resorted to fraud or engaged in illegal activities to the detriment of the business. PRs may have unearthed instances of transactions that destroyed value, and this could be one of the reasons why the number of resolutions is so low. The question is whether such transactions, if it turns out that they have eroded the value of the company, can be undone. Nonetheless, the value of such exercises lies in their potential to deter promoters, in general, of such misconduct; they could be penalized one way or another. It’s not easy to reform promoters, but you have to start somewhere. Now PRs will also have to look at the borrowing deals that companies have made to see if there have been “exorbitant credit operations”. It is not uncommon for companies struggling with liquidity to enter into loan agreements with lenders, including private equity firms, on unfavorable terms. This type of debt cannot hurt sales prospects.
Indeed, the creditors recover paltry sums; Twin Star was paying Rs 2,962 crore for VIL against the admitted claims of Rs 64,838 crore, which involves a 96% haircut. The recovery for Alok Industries, where a whopping Rs 29,523 crore was at stake, was paltry 17%. The process needs to improve.