Kolkata: Private sector lender Induslnd Bank has acquired a 4.7% stake in debt-laden tea maker McLeod Russel India by invoking pledged shares for recovery of its dues.
In the stock exchange filing, the bank said pursuant to invocation of pledge of shares, it acquired 50,00,000 equity shares of McLeod Russel, forming 4.7% of paid-up equity share capital of the borrower company, a part of the financially stressed Williamson Magor group.
“The equity shares of McLeod Russel India held by lchamati Investments were pledged with the bank for securing the outstanding dues of McLeod Russel India (MRIL), the borrower company,” lnduslnd Bank said, adding it invoked the pledged shares for recovery of its dues from MRIL, one of the world’s largest tea producers.
In a major relief to the Khaitans-controlled Williamson Magor group, the National Company Law Tribunal (NCLT) earlier this month has given its approval to withdraw the Corporate Insolvency Resolution Process (CIRP) against McLeod after its promoters reached a settlement with Techno Electric & Engineering, one of its financial creditors.
In June, lnduslnd Bank had acquired 70,67,500 equity shares of McLeod, forming 6.7% of paid-up equity share capital of the borrower company, by invoking pledged shares also for recovery of its dues.
Apart from IndusInd Bank, other financial creditors to the company are Indian Bank, Axis Bank, HDFC Bank, ICICI Bank, State Bank of India, UCO Bank, Punjab National Bank, Yes Bank, RBL Bank and Standard Chartered Bank, among others.
Notably, promoter shareholding in McLeod at the end of the first quarter of this fiscal stood at 10.1%.
Delay in resolving the bad debt of companies have led to disruption of assets for all parties, experts say. According to data, of the ongoing cases, 75% have already exceeded 270 days and took more than 400 days on average.
The Supreme Court also expressed its concerns in its ruling recently, and ordered that the corporate insolvency resolution process (CIRP) should not exceed more than 330 days.
There is a need to remember the very essence of the Insolvency and Bank Code – timely resolution. To avoid delay and make CIRP faster, Ashok Paranjpe, managing partner at legal firm MDP & Partners, gives three solutions :
1. Preventing delay in admission of cases
One of the main reasons for delay in CIRP is at the root of it, admission of cases, he says. When it takes time to admit cases, the company remains under the control of the defaulting owner enabling value shifting, data transfers and funds diversion.
The adjudicating authority must make sure that the case is admitted within the stipulated time period of 14 days from the filing of the application. The abuse of the provision under Section 12 of IBC has led to delay in adjudicating the pending matters under National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). Additionally, any successful bidder should not be permitted to suggest changes to any scheme approved by the committee of creditors and the adjudicating authority.
2. Professional code of conduct for the committee of creditors
According to Paranjpe, there is an urgent need to have a professional code of conduct for the committee of creditors, which will highlight specific duties and powers to take decisions on resolution plans, selection of the interim resolution professional and resolution professional.
3. Experienced and trained members of NCLT and NCLAT
It has been observed that very often orders passed by NCLT are appealed against to the NCLAT and ultimately the Supreme Court due to the lack of quality decisions from the judicial members of the adjudicating authorities. Recently, the Centre cleared appointments of 18 members to various tribunals in India, owing to the growing criticism over delays in filling up vacancies in NCLT.
About 75 per cent of the corporate insolvency resolutions ending in liquidation were earlier with the Board for Industrial and Financial Reconstruction (BIFR) or defunct.
These companies on an average had assets valued at around 7 per cent of the outstanding debt amount, according to the latest Insolvency and Bankruptcy Board of India data.
There have been concerns raised in certain quarters about the number of companies going into liquidation and steep haircuts taken by creditors under the Insolvency and Bankruptcy Code (IBC), which has been in force for nearly five years.
Value erosion
Nearly 47 per cent or 1,349 cases closed under the insolvency law ended up in liquidation till the end of June this year but economic value in majority of the cases had eroded even before commencement of the corporate insolvency resolution process, according to IBBI.
A total of 4,541 CIRPs (Corporate Insolvency Resolution Process) were initiated till end of June and out of them, 2,859 were closed.
Out of them, 1,349 CIRPs ended in liquidation while 396 ended in approval of resolution plans, as per the latest quarterly newsletter of the IBBI.
“The economic value in most of these corporate debtors had almost completely eroded even before they were admitted into CIRP,” the IBBI said.
Of the 396 corporate debtors rescued through resolution plans, 127 were in either BIFR or defunct, according to IBBI.
Realisation by creditors
“Till June 30, 2021, realisation by FCs (Financial Creditors) under resolution plans in comparison to liquidation value is 167.95 per cent, while the realisation by them in comparison to their claims is 36 per cent. It is important to note that out of the 396 CDs rescued through resolution plans, 127 were in either BIFR or defunct,” the newsletter added.
Around 51 per cent of the CIRPs were triggered by Operational Creditors (OCs) while nearly 43 per cent were initiated by FCs.
“However, about 80 per cent of CIRPs having an underlying default of less than Rs 1 crore, were initiated on applications by OCs, while about 80 per cent of CIRPs, having an underlying default of more than Rs 10 crore, were initiated on applications by FCs,” it noted.
According to the newsletter, the share of CIRPs initiated by CDs is declining over time and they usually initiated the process with very high underlying defaults.
Seeking to enhance transparency in the insolvency process, IBBI has amended regulations for corporate insolvency proceedings wherein a resolution professional will be required to provide details about his or her opinion about avoidance transactions pertaining to a corporate debtor.
The amendments to the regulations are aimed at enhancing “the discipline, transparency, and accountability in corporate insolvency proceedings”.
A resolution professional is duty-bound to find out if a Corporate Debtor (CD) has been subject to avoidance transactions, namely, preferential transactions, undervalued transactions, extortionate credit transactions, fraudulent trading and wrongful trading, and file applications with the adjudicating authority seeking appropriate relief.
This not only claws back the value lost in such transactions increasing the possibility of reorganisation of the CD through a resolution plan, but also disincentivises such transactions preventing stress to the CD.
“For effective monitoring, the amendment requires the RP to file Form CIRP 8 on the electronic platform of the Board, intimating details of his opinion and determination in respect of avoidance transactions,” the release said.
The IBBI has put out the format of form CIRP 8 and it needs to be filed in respect of every CIRP ongoing or commencing on or after July 14.
Intimation of changes
With the amended regulations, an insolvency professional conducting CIRP will also have to disclose all former names and registered office address(es) so changed in the two years preceding the commencement of insolvency along with the current name and registered office address of the CD, in all its communications and records.
The amendment takes into account the possibility where a CD may have changed its name or registered office address prior to commencement of the insolvency process. In such cases, the stakeholders may find it difficult to relate to the new name or registered office address and consequently fail to participate in the CIRP.
Roping in professionals
Under the insolvency regulations, an interim resolution professional or a resolution professional may appoint any professional, including registered valuers, to assist him in the discharge of his duties in the conduct of the CIRP.
“The amendment provides that the IRP/RP may appoint a professional, other than registered valuers if he is of the opinion that the services of such professional are required and such services are not available with the CD.
“Such appointments shall be made on an arm’s length basis following an objective and transparent process. The invoice for a fee shall be raised in the name of the professional and be paid into his bank account,” the release said. The amendments have come into effect from July 14.
Bankers feel that they are not getting a good price under the Insolvency and Bankruptcy Code, which has seen dismal recoveries in many cases.
“IBC is not the right solution. It is a resolution tool. If there is no resolution, automatically it goes to liquidation. That is a big problem. Resolution can be made if the underlying business is robust, says Siby Antony, chairman of the ARC Association of India.
He says banks feel that they are not getting the right price in IBC.
“Alok Industries was thought to be a very good asset but went for 17%. Binani Cement, Essar Steel were robust businesses and saw interest from strategic investors. But there are hundreds of assets where there is no interest from investors. These are smaller assets,” he said. The status of IBC cases
Out of the total 3,774 cases or corporate insolvency resolution processes (CIRPs) filed since the Insolvency and Bankruptcy Code (IBC) came into existence in 2016, 1,604 cases, or 43 percent have closed, by way of resolution, liquidation or other means. The rest 57 percent are ongoing with many overshooting the 330-day maximum time limit.
Of the 1,604 closed cases, only 14 percent have found a resolution, whereas 57 percent have ended in the liquidation of the companies.
Interestingly, the 72% cases of CIRPs ending in liquidation were already defunct and under the Board for Industrial and Financial Reconstruction.
About 312 cases have been closed on appeal or review or settled, 157 have been withdrawn; 914 ordered for liquidation and 221, saw approval of resolution plans.
The recovery rate for resolved cases under IBC is 44% with Rs 1.84 lakh crore recovered so far of the Rs 4.13 lakh crore admitted claims.
In case of the 12 large defaulters identified by RBI, the creditors recovered Rs 1.36 lakh crore from eight cases that have been resolved so far, with recoveries ranging from as low as 17 percent of claims in the case of Alok Industries, to almost 100 percent for Jaypee Infratech.
N Kamakodi, MD & CEO of Citi Union Bank said he preferred the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFESI) over IBC.
“Since our focus is more on SME lending, we have control over the assets of the borrower. Hence, most of our resolution plans are through SARFAESI action more than the IBC.”
He added, “What is more important is whether the borrower has the skin in the game. When you want to sell it as a going concern and when there is a sufficient value, then IBC is preferable. But if the borrowers’ skin in the game is less, then the SARFAESI is a better option.”
The 221 CIRPs that saw resolutions took an average of 375 days for the conclusion, exceeding the maximum 330 days permitted. The 914 cases under liquidation took on an average 309 days for the conclusion.
As on September 30, 2021, out of the 1,942 ongoing insolvency resolution cases, as many as 1,442 have been stretched beyond 270 days, while 349 such cases have been pending for periods of more than 180 days but less than 270 days.
As on September 30, 2021, out of the 1,942 ongoing insolvency resolution cases, as many as 1,442 have been stretched beyond 270 days, while 349 such cases have been pending for periods of more than 180 days but less than 270 days.
Recently, the National Company Law Appellate Tribunal (NCLAT) directed to initiate the liquidation process of edible oil company K S Oils Ltd and set aside an NCLT order passed against it. Terming it “unfortunate”, the appellate tribunal observed that even after the lapse of 981 days and repeated compliance by the Resolution Professional to initiate the liquidation process, the NCLT had not considered it.
Leading bank State Bank of India, one of the Committee of Credit (CoC) Member, on behalf of joint lenders forum who collectively holds 76.53 per cent had moved NCLAT based on which the appellate tribunal had on November 18, 2019, directed lenders to consider revised plans if any within two weeks and directed NCLT to pass appropriate order in accordance with the law.
The government is planning to set up a bad bank and an asset management company (AMC). Loans greater than Rs 500 crore which have not been declared fraudulent will be transferred to the bad bank. It is likely that the assets would not be subjected to IBC in the first instance, and the AMC will first try and revive these companies or package the loans to an investor.
Bad Bank
Also, creditors of several companies had signed the Inter Creditor Agreements (ICA) and may continue negotiation under the framework roping in distressed asset investors. Also, most of the ICA cases will have loans greater than Rs 500 crore, which will be transferred to the bad bank. MSME will be outside the scope of IBC pending notification of the designated framework.
