The Government of India of late overhauled the entire framework of bankruptcy law by introducing the consolidated and unified code- the Insolvency and Bankruptcy Code, 2016 (“IBC”). In the direction towards achieving the objectives of IBC, the Reserve Bank of India (RBI), in turn, issued a list of defaulting entities which were classified as “Non Performing Assets”. In multiple insolvency proceedings which have been initiated against the defaulting companies, we can see several interesting points emanating regarding the bidding proceedings under IBC.
Bidding process under IBC: Key Takeaways
Some of the key takeaways that have surfaced pertaining to the bidding process under IBC from the multiple insolvency proceedings include:
- Can the Adjudicating Authority (AA) ask the Committee of Creditors (CoC) to consider a revised bid made the post the bidding process? – The AA may consider a revised bid by a bidder who had earlier made a lower bid at the initial bidding stage. However, notably the same cannot be generalised and is subject to the satisfaction of the AA, CoC and other stakeholders and subject to matching up with the initial bid. Like in the Binani Cement case, NCLT asked the CoC to evaluate the revised bid made by Ultratech and to consider the Resolution Plan submitted by Dalmia Consortium in the event it matches the revised bid made by Ultratech.
The Take-Away: AA may ask the CoC to consider a revised bid made post the bidding process provided the revised bid is favorable to creditors and stockholders involved.
- Can there be an arrangement under IBC outside of bankruptcy proceedings to override the highest bid? – Remarkably, the IBC is silent on the validity of “out of the court deals” during the pendency of insolvency proceedings. In the Binani Cement case, the Supreme Court has explicitly ruled out the possibility of having an out of court settlement. However, interestingly the view of NCLT on the same is not concrete yet! We believe that any genuine arrangement should be given supremacy provided the deal is favorable to the creditors and the Company. Going a step further, the sanctity of such deals vis-à-vis the strict auction process under the IBC needs to be clarified and liberalised.
The Take-Away: Clearly a grey zone, but till the final order, view of the Supreme Court will hold supremacy thereby disallowing such outside court deals!
- Can there be a re-examination of a bid made if such a bidder was held to be ineligible by the Resolution Professional (RP) in the initial rounds of bidding? – A rejected bid of an applicant can be re-examined, however, such a re-examination can only be allowed in the event the provisions of IBC were not followed during the bidding process. In the Essar Steel Limited Case, the bids were rejected by the RP, however, it was considered to fall squarely within the ambit of non-adherence to the provisions of Section 34 of and hence accepted later.
The Take-Away: A rejected bid can be re-examined on the limited grounds non-compliance with IBC code earlier or if the CoC did not act in accordance with the provisions of IBC.
- Can the employees of the Corporate Debtor challenge the Resolution Plan submitted by the highest bidder post the bidding process? – Unless the Resolution Plan submitted by the highest bidder does not cater to the interest of the employees or is in contravention to the stipulations of Section 29A of IBC, the employees of the Corporate Debtor cannot challenge such plan. The order in Bhushan Steel Limited Case supports the same. Furthermore, if the Resolution Plan submitted by the highest bidder fulfills the requirements of Sections 30 and 31 of IBC, the resolution plan cannot be called into question.
The Take-Away: Employees cannot challenge the Resolution Plan post the bidding process provided the Resolution Plan caters to the interest of the employees and is not in contravention of provisions of the IBC.
- Is a conviction of the bidder sufficient to render it as ineligible under section 29A of IBC? – In the Bhushan Steel Limited Case, a wholly owned subsidiary of the highest bidder was convicted under (UK) HWA Act, 2014. However, the same did not per se render it as ineligible as the punishment prescribed under the said Act does not correspond to that prescribed under Section 29A of IBC in terms of nature and term.
The Take-Away: Merely a conviction does not render the bidder as disqualified under Section 29A unless it complements the punishment of the similar nature and term as prescribed in Section 29A.
Way Forward
Having stated the key takeaways emanating out of ongoing insolvency proceedings, there are several grey areas which are required to heed to by the companies before undertaking the bidding process. For instance- widely worded restricted zone under Section 29 A of IBC; the legal sanctity of “out of the court deals”; wide and unguided power to CoC which may lead to hostilities from the management side- to name of few of such grey spots. Certainly, we anticipate the amendments and clarifications under IBCto be witnessed soon.
Meanwhile, the judicial activism may have a robust role to fill in the time gap, as we can already see the same happening like in the case of Bhushan Steel insolvency proceedings wherein NCLT ordered to consider the Liberty House’s bid even though the same was submitted after the timelines.
Lastly, considering the gaps in the procedural issues under IBC, till the time there is any clarification(s) from the regulators or any judicial precedent on the point, the parties involved in the bidding process and/or insolvency resolution mechanism may consider and follow the suggestions mentioned hereinabove to avoid any procedural or legal hassle.
Views expressed in this article are of Rajesh Begur, Managing Partner, ARA LAW and do not necessarily reflect the views of The Banking & Finance Post.
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