The Binani Saga – Value Maximization Above All?

The Binani Saga – Value Maximization Above All?

By Jolly Abraham

Ultratech and Rajputana Properties were among the resolution applicants for Binani Cement. Based on evaluation criteria specified in a process document provided to all persons who had submitted an expression of interest to the resolution professional for Binani Cement (RP) and following the timelines specified in such process document, Rajputana Properties’ resolution plan was selected by the committee of creditors of Binani Cement (CoC) as H1 and Ultratech’s was not. Long after the date specified in the process documents as the last date for submission of resolution plans (Relevant Date) and after Rajputana Properties was declared H1, Ultratech has made a substantially higher offer for Binani Cement, seemingly as an amendment to its original resolution plan.

In this context, the NCLT Kolkata has now held that the RP and CoC made a mistake when they followed the process document provided to all potential resolution applicants and refused to consider/ approve the higher offer made by Ultratech after the Relevant Date. The NCLT Kolkata has indicated that, even though H1 had been announced, in order to maximize value of assets, the RP and CoC should have amended the process document so that they could consider Ultratech’s higher offer. To remedy this error, the NCLT Kolkata has now ordered the RP and CoC to consider Ultratech’s higher offer submitted after the Relevant Date even though the CoC had deliberated on Ultratech’s original plan and decided that it was not H1. The NCLT Kolkata has also suggested that the RP should now run a bidding process between Ultratech and Rajputana Properties.

There are several reasons why this order should be challenged. Among the many compelling reasons are the following:

1.    Its reading of section 25(2)(h) of the Insolvency and Bankruptcy Code, 2016 (IBC) without referencing or evaluating the relevant IBBI regulations

2.    Its questionable findings on the binding nature of the process document issued by the CoC and the RP and the sanctity of timelines specified in the process document

3.    The suggestion (which does not seem to have any legal basis at this stage of the insolvency resolution process) that the resolution professional must now run a bidding process between Rajputana Properties and Ultratech.

If there is no challenge to this order and this order correctly interprets the IBC, the following process questions arise:

1.    Will the resolution professional also now be bound to consider a higher resolution amount that may be proposed by a resolution applicant other than Rajputana Properties and Ultratech?

2.    Will the resolution professional also now be bound to consider a better resolution plan (whether or not it involves a higher resolution amount) that is proposed by any person other than one of the original resolution applicants?

3.    Will amendment of the process document by RP and CoC so that they can consider the higher offer made by Ultratech after the Relevant Date or running a bidding process between Ultratech and Rajputana Properties at this stage of the insolvency resolution process not be unfair to the other resolution applicants who submitted their respective value-maximizing resolution plans in accordance with the process document?

4.    Is the time that will be spent litigating any or all of the above matters to be excluded from the 180/ 270-day timeline specified in the IBC?

At a more fundamental level, we should recognize that if NCLT Kolkata is right, this is a precedent that would allow any low-balling resolution applicant to make a higher offer after the RP and CoC have made their choice from amongst the value-maximizing resolution plans available to them having followed a transparent time-bound process. If this is acceptable, pray why should any resolution applicant bother to submit its value-maximizing resolution plan as part of the transparent time-bound process contemplated under a process document issued by the CoC under the IBC?

If, in the name of maximizing value of assets, anyone has the option to step past the successful resolution applicant who followed the process document, is there any incentive for any resolution applicant to invest time and effort to follow the CoC’s process document and submit a value-maximizing resolution plan within the timelines prescribed in the process document? If any resolution applicant does so, it will only be aiding price discovery for someone else with deeper pockets. This is disastrous since potential resolution applicants will lose interest in the IBC process purely on account of deal uncertainty. The corollary of course, is that if we do not have value-maximizing resolution plans coming through as part of the IBC process, this will result in lower recoveries for creditors overall, more litigation and more stressed assets heading for liquidation rather than insolvency resolution.

The object of the IBC is ‘… reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner formaximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues…’.

Is maximization of value of assets in the Binani case an object to be achieved by itself even if it defeats the other objects of IBC i.e. that insolvency resolution must occur in a time bound manner and must balance the interests of all stakeholders? Are resolution applicants amongst the stakeholders whose interests need to be balanced by IBC? Are companies that enter the corporate insolvency resolution process hereafter amongst the stakeholders that the NCLT should consider when setting precedent?

If the IBC has to work as intended i.e. as a viable, consistent insolvency resolution mechanism, we cannot be creating an imbalance in favour of some stakeholders (one unsuccessful resolution applicant and the creditors in this case) while devaluing the other stakeholders (the other resolution applicants in this case) who have sought to maximize value within a transparent time-bound process framed by the CoC and RP under the IBC. The IBC has to consistently ensure value maximization within the framework of a transparent time-bound process in order to balance interests of all stakeholders, including the resolution applicants. By all means, make any sensible changes that can be made to improve value maximization within a transparent time-bound process. But if the time-bound process has to work – if IBC has to work – there should be no avenue left open for value maximization outside a transparent time-bound process.

Unfortunately, NCLT Kolkata seems inclined to open the doors for value maximization outside the CoC-determined time-bound transparent process under IBC. In the interest of achieving the stated objects of the IBC, let us hope this door is firmly shut by the higher courts sooner rather than later and that the potential damage to insolvency resolution in India is minimized.

Jolly Abraham is Legal Counsel at True North, a participant in the insolvency resolution process for Binani Cement. These are her personal views.

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