Friday, 27 November 2020

Edelweiss Asset Reconstruction Company Ltd. vs. Bharati Defence and Infrastructure Ltd - Resolution Plan with sole intention to sell the Co. subsequently, cannot be Approved.

NCLT Mumbai  (14.01.2019) in Edelweiss Asset Reconstruction Company Ltd. vs. Bharati Defence and Infrastructure Ltd. [MA 170/2018 in CP292/I&B/NCLT/MAH/2017] held that; Acquiring property of the corporate debtor and running the company with the sole intention of value addition and after that selling, the company and its assets, can’t be treated as Insolvency Resolution Plan of the corporate debtor. Such a plan can’t be approved given the law laid down by Hon’ble NCLAT in case of Binani Industries Limited (supra).


Excerpts of the order;

# 1 The MA No. 170 is filed by the RP seeking approval of the Resolution Plan submitted by Edelweiss Asset Reconstruction Co. Ltd (EARC) duly approved by the CoC by a vote share of 94.3 %.


# 4 The Expression of Interests (“EOI”) were published on 04.09.2017 and 11.01.2018, in response to which five resolution plans were received by the RP. Out of the five resolution plans received by the RP, one plan was put before the CoC for consideration, and the other four plans were not in compliance with section 30(2) of IBC. The said plan was approved by a requisite majority of voting share of CoC on 03.03.2018.


# 52 Hon’ble NCLAT in Binani Industries case supra has held that:

  • “the IB Code defines resolution plan as a plan for insolvency resolution of the Corporate Debtor as a going concern. ..... 

  • It is not a sale. No one is selling or buying the “Corporate Debtor” through a resolution plan. It is a resolution of the Corporate Debtor as a going concern. One does not need a resolution plan for selling the Corporate Debtor. If it were a sale, one can put it on a trading platform. Whosoever pays the highest price would get it. There is no need of voting or application of mind for approving resolution plan, as it will be sold at the highest price. One would not need, Corporate Insolvency Resolution Process, Interim Resolution Professional, Resolution Professional, Interim Finance, calm period, essential services, Committee of Creditors or Resolution Applicant and detailed Regulated Process for the purpose of sale. ..... 

  • It is not an auction. Depending on the facts and circumstances of the Corporate Debtor, Resolution Applicant may propose a resolution plan that entails change of management, technology, product portfolio on marketing strategy; acquisition or disposal of assets, undertaking of business; modification of capital structure or leverage; infusion of additional resources in cash or kind over time; etc. Each plan has a different likelihood of turnaround depending on credibility and track record of ‘Resolution Applicant’ and feasibility and viability of a ‘Resolution Plan’ are not amenable to bidding or auction. It requires application of mind by the ‘Financial Creditors’ who understand the business well.”


# 53 It is thus clear that resolution plan should be a plan for insolvency resolution of the Corporate Debtor as a going concern and not for the addition of value and intended to sale the Corporate Debtor. In the approved resolution plan, it is specifically stated that the Resolution Applicant will run the operations of the company with the help of professional management team and over a period, endeavour to find a suitable investor/buyer for the same. There is provision for selling the assets of the company, encashing the Bank Guarantee, collecting the money from the refund of margin money and collecting cash from the sale of the immovable properties of the subsidiary companies and further right-sizing the work force, i.e. reducing the strength of workforce from a current number of 800 employees. The resolution plan envisages sale of the company after addition in value. There is no provision of infusing cash by RA from its resources. Hon’ble NCLAT has held that the resolution plan should not be a plan for just for sale or auction. Acquiring property of the corporate debtor and running the company with the sole intention of value addition and after that selling, the company and its assets, can’t be treated as Insolvency Resolution Plan of the corporate debtor. Such a plan can’t be approved given the law laid down by Hon’ble NCLAT in case of Binani Industries Limited (supra).


# 54 The resolution plan mentions that the lenders intend to keep the company as a going concern to improve recovery and preserve national asset. The plan as submitted by the lead lender is to operate this company by placing professional management and sell to an investor in the next three years. It further states that the lenders should not be termed as promotors of the company at any point. It is further stated in the statement of purpose of the resolution plan that the CoC believes that the business unit has the potential of revival. It is stated in the plan that EARC as the lead lender is proposing a plan by way of which lenders will hold majority equity in the company, will run the operations of the company with the help of professional management team and over a period endeavour to find a suitable investor/buyer for the same. It is requested to this Tribunal and other authorities, in the resolution plan, to support in bringing the erstwhile promoters to the task, make good the imprudent transactions and allow financial creditors to run the company with the help of a professional management team till they find an investor for the company.


# 55 It is admitted that the resolution applicant is the lead lender holding 82.7% of share in financial debt, by which it may be presumed that it had access to certain information and proceedings of the CoC and the voting rights in the decision making of the CoC that a financial creditor would have.


# 56 When such a resolution plan, that is not with the intent of running the company, but to manage it for a specified period of time, three years as per plan, and then sell it to an investor, then it raises a doubt regarding the object of the resolution plan . The object of the Resolution Plan should be to save the company and not recovery of the debts of the financial creditors which appears to be the case in this resolution plan.


# 59 The resolution plan proposes to “right size” the current workmen, employees and consultants employed/appointed by the company. For this, the plan proposes to first cancel all the existing contracts with the employees/workmen/consultants and extinguishing the rights of employees/workmen/consultants to raise claims against the company without complying with the requirement of labour laws and this the resolution plan proposes to do by order of this Tribunal. The company would then enter into new contracts with employees/workmen, that is proposed to be retained, on revised terms as per the operational requirements of the company.  …………. The resolution applicant wants all powers to decide the fate of employees /workmen/ consultants of the company and further seeks exemption from complying with the applicable laws and immunity from any claims from the employees/workmen/consultants so terminated. We are of the strong opinion that it would be inappropriate to approve such a plan, which contravenes the law, and which is prejudicial and causing injustice to the existing employees/workers/consultants.


# 64 The Resolution Plan, as per Regulation 38 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 has identified the sources of funds that consists of inflows from its ongoing operations, the existing liquid investment, existing cash balance, release of margin money, receipt from debtors, sale of Kolkata Yard, sale of Andheri office and other identified assets, sale of scrap, etc. that is to say only the internal funds are being identified for Regulation 38. The resolution applicant is not infusing any upfront money in the company.


# 70 The plan also does not envisage any upfront payment towards outstanding dues, and no concrete schedule of payment is proposed such as payment of particular sum/band in 70 The plan also does not envisage any upfront payment towards outstanding dues, and no concrete schedule of payment is proposed such as payment of particular sum/band in quarterly/half yearly/yearly basis, etc. The timeline proposed is at the end of three years, after/at the end of 10 years, after 15 years, etc. which is very ambiguous. Considering such an ambiguous financial plan, may not be in the interest of the financial creditors as well as of the company to continue to run the company smoothly as a going concern. Therefore, the proposed Resolution Plan does not provide for the exact term of the plan, and it's implementation schedule as prescribed in Regulations 38(2)(a) and provisions for approvals required from various authorities/statutory bodies and timelines for the same as prescribed under Regulation 38(3)(d)


# 76 It is noted that E&Y/E&Y LLP is providing entire service in the current CIRP like a single window system viz. the RP, Mr Dhinal Shah is partner of E&Y, the Power of Attorney holder Mr Dinkar Venkatsubramaniam is also from E&Y, RP’s team members are also from E&Y, Investment Banker appointed during the CIRP is also from E&Y. This creates a conflict of interest which was even highlighted by the counsel for the suspended Board of Directors for the Corporate Debtor. We believe that the RP and CoC have failed to ensure appropriate checks and balances and failed to implement “Chinese wall” concept during the entire CIRP. Further, this will also act as a monopoly in the entire CIRP, which needs to be examined by IBBI. Therefore, we direct IBBI to examine this issue and to frame suitable guidelines. The successful Resolution Applicant wants to find a suitable buyer for the corporate debtor on a going concern basis within three years, whereas the Resolution Applicant has proposed in its scheme continuing unsustainable debt of ₹600 crores at 0.01% interest payable after 10 years and convertible debt of ₹1000 crores at 0.01% interest with conversion option with Resolution Applicant, non converted portion to be repaid after 15 years. Therefore a substantial amount of debt will be paid/ converted after 10 years/15 years which is not matching with the overall scheme of the Resolution Plan.


# 82 From the details of expenses incurred for Corporate Insolvency Resolution Process submitted by the Resolution Professional, we have observed that during the CIRP, under the period of Resolution Professional, the expenses of ₹2.57crores has been paid towards Legal Professionals, ₹4.27 crores paid to the Professionals of RP team and ₹0.25 crores was travel and other out of pocket expenses. Thus approximately an amount of ₹7 crores was paid towards Legal fees and fees to the Professionals of RP team. We have observed that an amount of ₹16.53 crores have been paid towards Employees and Workmen for approximately 850 employees which translates into approximately ₹1.5 crores per month. Whereas for a handful of employees of a team of RP was paid approx. ₹75 lakhs per month which we feel, that there is no transparency and adequacy of the fees paid to the team of RP and legal fees.


83 The number of employees and workmen are 896, and their monthly bill is ₹1.55 Crores which works out to an average of ₹17,250 whereas the average fee paid to the other professionals/team of RP engaged works out to approximately ₹7.5 lakhs per month. We have also observed that the amount of ₹9,07,16,025 was paid towards other expenses from 06.07.2017 to 30.06.2018, details for the same are not provided. Fee payable to the RP was ₹37.48lakhs and cost of insurance for RP was ₹33.80lakhs, from the details submitted by the RP it is noticed that an amount of ₹5,58,48,283 was paid towards fee to legal professionals, fee payable to any other professionals, fee payable to other professionals, other expenses etc. and the same works out to ₹42,96,020 per month. This amount is exclusive of fee payable to RP of ₹40,78,320 and ₹57 lakhs fee payable to all three registered valuers.


# 85 The RA has also not given a practical and viable plan to manage the affairs of the corporate debtor. We are of the considered view that the plan is not compliant with section 30(1) (b) in addition to other lacunas as discussed above and is in contravention of the provisions of the Law. The proposed plan is not in the interest of all stake holders including the financial creditors, as they are taking a haircut of more than 95% and paid only around 4% that too without any certainty/fixed payment schedule. The operational creditors are proposed to be allotted shares, especially to the Government of India. The same is in addition to various waivers sought, the sale of assets of the Corporate Debtor, not to repay the huge advances received especially from the government departments as discussed above.


# 87 It is pertinent to mention following part of the report where it is stated that “the CoC believes that the asset is of great national importance in more so, a viable unit which is a viable potential…. The company employs more than 800 people and has been building ships for the Indian Coast Guard & Ministry of Defence. Such assets take a lot of time to build and hence liquidation of the company will be loss to nation, the public and its creditors.”


# 88 The purpose of the resolution applicant, who also holds the 82.5% (approx.) of the financial debt of the corporate debtor and consequently majority voting share in CoC, is clearly to run the company and try to add value to it for three years or so and then sell the same to an interested investor. This, in essence, is what was supposed to be done within the stipulated time for CIRP. The resolution applicant through its resolution plan is, in effect trying to extend the stipulated period beyond the law to find an investor for the Corporate Debtor. This, in our view, was not what was intended by the legislature. Moreover, the resolution plan is not to buy and selling of the Corporate Debtor as has been held in Binani Industries Limited (supra.) by the Hon’ble NCLAT. Considering all the aspects as mentioned above, the resolution plan deserves to be Rejected. It also appears that resolution plan envisages sale of the corporate debtor after value addition. Considering the nature of business, having Defence Warship Manufacturing License, and fact that the asset is of great national importance and the company provides employment to more than 800 people and has been building ships for the Indian Coast Guard & Ministry of Defence, we also agree that scrap sale during liquidation will be loss to nation, the public and its creditors. If the ultimate object in the resolution plan is to sell the company, then it can be achieved by allowing the sale as a going concern during the liquidation process.


# 99 Given the discussions above, facts and in circumstances of the instant matter, instead of approving the resolution plan as approved by CoC, we at this moment reject the resolution plan u/s 31(2) of the IBC, 2016.

ORDER

# 100 We direct that the Corporate Debtor be liquidated as per provisions of Regulation 32(b) & (e) of the IBBI (Liquidation Process) Regulations, 2016 which provides for assets in a slump sale, the corporate debtor as a going concern, in the manner as laid down in Chapter III under Part II of IBC, 2016.


# 101 However, considering the national importance attached to product line of the company, the customers explicitly Ministry of Defence, Indian Coastguard, Customs etc, order book size, advances paid by various Government Departments, the work in progress stalled at various stages of production and huge number of workforce (around 850 employees) we direct that the Liquidator shall endeavour to sell the Corporate Debtor company as a going concern.


# 102 Given the conflict of interest of the RP as discussed in detail above, we intend to appoint a new Liquidator. We hereby appoint Mr. Vijay Kumar V Iyer having registration no. IBBI/IPA-001/IP-P00261/2017-18/10490, e-mail id. viyer@deloitte.com and Ph. No. 9821219493. The RP is directed to handover all the documents/records to the liquidator.


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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.