Videocon’s Haircut – Shabby Hair Style or The Failure of IBC’S Salon?

Divyansh Ganjoo*

Introduction

Let’s admit, the Insolvency and Bankruptcy Code, 2016 (“IBC”) has a haircut problem. Haircuts rose to a 60 per cent in fiscal 2021, as was published in the quarterly newsletter[i] by Insolvency and Bankruptcy Board of India (“IBBI”). In the March 2021 quarter alone, there was a whopping 74 per cent increase in haircut towards the claims made by the lenders against their defaulters. The jewel on the crown was the Corporate Insolvency Resolution Proceedings (“CIRP”) of Videocon Industries and it’s 12 subsidiaries which had a collective outstanding claim of Rs 64,838.63 Crores, but the resolution plan approved by the Committee of Creditors (“COC”) and later on by the Adjudicating Authority (“AA”) of Anil Agarwal’s Twin Star Technologies’ only had a nominal bid of Rs 2,962.02 crore, a massive haircut of 96 percent. As per the valuation reports, the liquidation value of the Corporate Debtors (Videocon) was Rs. 2568.13 Crores whereas the fair value was Rs. 4069.95 Crores. The Adjudicating authority in-fact assenting the resolution plan, sarcastically called it a tonsure or a total shave. Although the National Company Law Tribunal’s (“NCLT”) order was later on stayed by National Company Law Appellate law Tribunal(“NCLAT”), it nevertheless becomes pertinent to analyze this mess and thereby assess the internal and the external factors responsible for it, and make head or tail out of the Videocon Situation.

Is it an IBC Problem to begin with?

The whole economy bore the brunt of Covid-19. Functioning of courts was affected and various legal modalities and procedures were put on crutches. IBC too faced a similar situation wherein Section 7, 9 and 10of the Code stood suspended for a significant period. NCLT in exercise of powers conferred under Rule 11 of National Company Law Appellate Tribunal Rules, 2016 took suo moto cognizance of the unprecedented situation arising out of spread of Covid-19.  Now one important question to consider here would be whether Covid-19 added to an already existing problem and accentuated it further or this situation sooner or later would’ve arisen with or without the pandemic? Few think the latter, for example M.S. Sahoo, the Chairperson of IBBI in a recent interview stated that if a company has been a distressed sick entity for years, and its assets stand depleted, then IBC is bound to yield huge haircuts. One can easily figure that the realizable value of an entity already on life-support must have taken a further hit due to the pandemic. Siva group-IDBI Bank deal would be a good example of this situation where the promoter offered one time settlement of just 6.5 percent of the total debt of Rs 4,863 crore which was accepted by the lenders and was followed by withdrawal of application from NCLT.  One could argue that even the recovery under IBC regime remains low. Recovery rate under IBC being 21 per cent, it is important to observe that if one was to exclude the cases of Electro steel, Bhusan Steel, Monnet Ispat, Essar Steel, Alok Industries, Bhusan Power & Steel, Jyoti Structure (7 out of the 780 closed cases), the recovery rate would fall sharply to 10 percent. Mr Sahoo arguing against this statistic pointed out that the aim of IBC is reorganization and not recovery. He further added that IBC was never meant to be a recovery tool, thus the criticism of IBC by pointing out loan recovery rate doesn’t take into account the object of the Code and thereby dismissed recovery as an incidental benefit. There might be another reason for such haircuts; there simply isn’t enough demand in the market for stressed entities. A lot of companies have reserved their purchasing power since the onset of Covid-19 and hence the Corporate Debtors assets are getting acquired further and further away from their fair value.

Doubts over Confidentiality of valuation

As stated above the fair value of the Corporate Debtors (Videocon) was Rs. 4069.95 Crores whereas the liquidation value was Rs. 2568.13 Crores. The bid of 2,962.02 crores offered by Twin Towers was found suspiciously close to the actual liquidation value of Videocon. But why is all this important in the first place? To understand this, it is necessary to consider how fair value of an entity is arrived at and what are the reasons for finding it out. Fair value as per CIRP Regulations, 2016, as defined under sub-section (Hb) of Section 2 is the estimated realizable value of the assets of a distressed entity, in an arm’s length transaction where all the parties act prudently, knowledgeably and without any compulsion. The evaluation matrix provided as under the code is used by the IBBI appointed valuators to arrive at fair value. Fair value is important as liquidation value offers a conservative approach towards actual estimation of entity’s value and drives down the value of entity’s assets. Such fair value is usually made available to the CoC members on account of a declaration to the effect that they shall maintain utmost confidentiality of such values. Additionally, it is also the responsibility of the RP and the registered valuers to maintain such confidentiality. NCLT during the hearing of Videocon found it quite surprising that the resolution applicant through its valuation arrived at an almost identical figure as that of the registered valuators appointed by IBBI; considering how corporate debtor and its subsidiary companies have varied business interests and represent different product segments. NCLT ordered IBBI to examine the issue in depth and ensure that the spirit of confidentially clause should be maintained by all the connected parties in letter or in spirit, and to quote “the confidentiality clause must be followed unscrupulously.” NCLT further asked IBBI to frame appropriate regulations and ensure maximization of the value of corporate debtor’s assets.

Breakup of payments and The MSME problem

The approved Resolution Plan mandated the following payments. Assenting secured financial creditors were to receive 4.89 per cent, assenting unsecured financial creditors would be credited 0.62 per cent, dissenting secured financial creditors were to get 4.56 per cent and dissenting unsecured financial creditor would receive NIL.

It was observed by the NCLT that operational creditors were receiving an extremely meager amount of 0.72 per cent out of the approved 2962.02 Crores. It was found that a voluminous number of operational creditors were Micro, Small and Medium Enterprises (“MSME”), and if they were to be paid only 0.72 per cent of the aforesaid amount, in the near future many of them would inevitably face insolvency proceedings. Therefore, AA requested both, the Successful Resolution Applicant (“SRA”) and the COC to increase the payout obligation towards the operational creditors, MSMEs more particularly.

NCLT’s assent to the Resolution Plan

Despite the abovementioned concerns, AA assented to the resolution plan. In its order it cited the case of K. Sashidhar vs. Indian Overseas Bank[ii] in which the Supreme Court held that the role of NCLT was only to satisfy itself with respect to cornerstones of requirements provided under Section 30(2) of the Code. The apex court stated that the NCLT cannot scrutinize the resolution plan beyond the purview of this section and its role is ‘nothing more and nothing less’. AA further relied on the case of Essar Steel[iii] in which it was held that NCLT only had supervisory jurisdiction and could not go beyond the commercial wisdom of COC. One interesting observation made by AA in the current proceedings was that it is not empowered to modify the resolution plan but has authority to send it back to COC for reconsideration. NCLT cited a plethora of judgments and found that in the light of stated discussions the law was settled, and it found that the proposed Resolution Plan met the requirements of Section 30(2).

NCLAT’s Stay on Resolution Plan

Councils for the appellant companies, which were the dissenting financial creditors, argued that the compliances under Section 30 read with Section 53 of the Code were not met as the upfront payment provided by the Resolution plan was not adequate. Furthermore, Non-Convertible Debentures (“NCD”) had been adopted as a means of discharging the appellants’ debt. NCLAT agreeing with the abovementioned averments found that the corporate debtor just had Rs 200 crores cash in consolidated proceedings and SRA would bring a mere amount of Rs 262 Crores. The first payment was being bought over the period of 25 months and beyond these 262 Crores, rest of the amount was being bought over the period of 6 years and said payments were being made by the way of NCDs. Considering the arguments made by the appellant’s councils and exceptional circumstances of the case, NCLAT decided to stay the AA’s approval on Videocon’s resolution plan and restored the status quo of RP in managing of Corporate debtor’s affairs.

Conclusion

Considering all this we have to give IBC a certain benefit of doubt, as pre-existing distressed assets already had massive haircut apprehensions and Covid-19 worked like kerosene in an already existing fire. It’ll be interesting to observe how NCLAT approaches the issue as the hearing of matter is reserved for 7th September, 2021. The order of NCLAT directly stands in contravention of Essar Steel judgment and some argue that it also sets back the dial for IBC. As far as the valuation of the company is concerned IBBI needs to come up with a full proof mechanism for valuation of the corporate debtor and evaluate the evaluation matrix. Sometimes difference between the valuation of the company by Corporate Debtor’s auditors and IBBI appointed valuators is huge. Since latter serves as a reference point for the bid price of the resolution applicants, one needs to find out whether it is the bid price or the valuations that are ‘dirty’, or the current evaluation matrix is ineffective and inefficient.

The author is a fourth-year Student at University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University.

[i] Insolvency and Bankruptcy Board of India, The Quarterly Newsletter of the Insolvency and Bankruptcy Board of India, January – March, 2021 | Vol. 18.

[ii] Civil Appeal No. 10673/2018.

[iii] (2020) 8 SCC 531.