By adopting a few steps many companies that have no alternative but to go to the NCLT to keep themselves from closing down can be saved
I have no doubt that like me most people connected to the world of commerce and business believe that the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 remains one of the most important and transformational reforms for corporate India.
In one fell swoop it has changed forever the way promoters can look at their businesses. It is common knowledge that prior to the implementation of the IBC there was a general belief that the bigger the default by a promoter, the more secure was his hold over the company (too big to fail syndrome). Today, every promoter knows that in the event of default or continuing default — whether intentional or inadvertent — he is likely to lose control over his company unless he is willing to bring in sizeable new capital on his own to repair the financial situation and avert a default.
However, so far the experience in case of companies that have been “admitted” by the National Company Law Tribunal (NCLT) under the IBC has been painful with the cure mostly working out to be worse than the disease. The reason is the process involved — formation of a committee of creditors, appointment of the interim resolution professional (IRP) and thereafter the resolution professional (RP), issuing a request for proposal (RFP) inviting expression of interest (EOI) from interested bidders, shortlisting interested bidders, finalising information memorandum (IM) and draft share purchase agreement (SPA), inviting actual bids, thereafter, selection of the successful bidder based on most favorable bid, and finally achieving consensus amongst COC members (or at least those financial creditors who hold at least 67 per cent of the total financial dues payable by the company).
Invariably, since the company generally requires urgent injection of working capital, such delay pushes the company into a deeper hole by the time a bid is accepted. Even after that, the same remains open to legal challenges, which, most of the time due to the failure in getting timely court orders, delays a resolution further. The result invariably is that by the time the surgeon is ready to operate, the patient is either dead or has slipped into a coma.
In order to get the best out of IBC and to ensure that as soon as the patient enters the hospital (NCLT), it is first provided an oxygen mask to ensure sustenance and survival well before the entire tedious process under IBC commences, I suggest the following solution:
1) The financial creditors/appointed consultants should identify potential serious bidders for the company before going to the NCLT. (They must also agree upfront on appointment of suitable advisors to monitor the entire process. This would save precious time.)
2) The shortlisted ones should be allowed limited due diligence to be comfortable with current situation of the company and future potential. Detailed due diligence on past can be avoided as the bidder, if selected, would only take it under IBC process whereby the company (and the acquirer) would get protection against past demands which are not going to be part of the “admitted liabilities” by the NCLT as well as criminal investigations and proceedings for past acts of omission and commission.
3) Based on the above, the bidders would need to submit a legally binding bid for the company, subject to the acquisition being under IBC, along with an agreed SPA. Normally, suitable security either in form of escrow or bank guarantee will be taken from the bidder to ensure that he honors the bid if he is the final winner as explained in the fifth point.
4) The best bid received as per the third point should be treated as the bid to be used for “Swiss challenge” once the company is admitted by the NCLT under the IBC. Such a bidder is referred hereinafter as the “Swiss challenger” (The term “Swiss challenge” came from the identification of Switzerland as a “neutral country”, which is the essence of this method as explained hereafter.)
5) The selected bid would be then used as a base bid or say the “reserve price”, inviting bidders under normal IBC auction — to better on a like-for-like basis. The condition is that if the bid(s) received is better than base bid, the original bidder (whose bid is used for the “Swiss challenge”) will get the right of first refusal, that is, ROFR for matching highest bid. If he chooses not to match, the bidder with highest bid will be declared the winner.
The biggest advantage of the “Swiss challenge” is that since the restructuring of existing liabilities — both financial and operational — would be predefined as a condition precedent in the bid, the COC would have pre-approved the resolution plan. Accordingly, invariably the lead banker or a group of bankers would be able to extend “priority lending” as the urgently needed working capital to the company with a clear condition that the funds coming post conclusion of final bid — either from the “Swiss challenger” or the fresh bidder (as explained in the fifth point) will first be paid to settle such priority lending before any other payments. I understand that such priority lending is already covered as being first in line for repayment. In case of ambiguity, necessary amendment in the IBC for this must be made immediately.
I have no doubt that the adoption of this methodology will result in saving many companies that have
no alternative but to go to the NCLT to keep themselves from closing down. This would result in saving jobs and capital as well as prevent large-scale non-performing assets. Unfortunately, in the absence of such an approach, many companies that can be saved and sustained, might end up being liquidated.
The author is chairman, Bharti Infratel & vice-chairman, Bharti Enterprises
Views are personal