Maximisation Of Value Key To Successful Resolution Plan

Debate on the underlying objective of IBC 2016 (Insolvency and Bankruptcy Code, 2016) revolves around completion of resolution plan within a deadline or maximisation of value for recovery by the lenders.

The ongoing resolution of Reliance Capital has reignited this debate. The deadline for the completion of Reliance Capital resolution plan has been extended multiple times in the last one year, owing to different reasons, and due to the ongoing litigation in the NCLT, it seems that the current deadline of 31 January may see another extension.

The chronology of events of last one month however reveal that the value of the resolution plans for the company has almost doubled, from Rs 5300 crores to Rs 10,000 croes, in a span of mere 30 days.

On 28 November 2022, four companies submitted their resolution plans. A consortium of Cosmea Financial and Piramal was the highest bidder with a binding bid of Rs 5231 crores, including an upfront cash offer of Rs 4250 crores. Hinduja’s IIHL was the second highest bidder with an offer of Rs 5060 crores. This included an upfront cash offer of Rs 4100 crores.

The other two bidders, Torrent and Oaktree submitted binding bids of Rs 4500 crores, with upfront cash offer of Rs 1100 crores and Rs. 4200 crores, including upfront cash of Rs 1000 crores respectively.

These bids were far below the average liquidation value of Rs 13,000 crores fixed by the two independent valuers and Committee of Creditors (COC) of Reliance Capital decided to conduct an auction to achieve better realisation for the lenders. 

Torrent emerged the highest bidder (H-1) in the auction with a resolution plan value of Rs 8640 crores out of which the upfront cash offer was Rs 3750 crores. Hinduja’s IIHL was H-2 at Rs 8110 crores.

Post the auction, IIHL increased their bid to Rs 10,000 crores, including an offer to pay upfront cash of Rs 9,000 crores. Torrent challenged  the legality of the IIHL bid in the NCLT and terming it non-compliant, but itself sweetened its bid by offering to pay the entire Rs 8640 crores in upfront cash to the lenders. 

The stage is now set for a second round of auction for Reliance Capital. The lenders of Reliance Capital are targeting over RS 10,000 crores from the second round of auction, scheduled for 19 January. The reserve price itself has been set at Rs 9500 crores, with minimum cash offer of Rs 8000 crores.

A look at the chronology of these events clearly indicates that decision of the lenders to conduct an auction for maximisation of recovery and value was the wise decision that has worked in their favour. Not only the size of the resolution plan has almost doubled, the recovery in the form of upfront cash is now almost 100%. It is rarely a case in the IBC that bidders offer the entire bid value as an cash upfront.

The Reliance Capital case also proves that if lenders are getting better recovery from the prospective resolution applicants, then the question of closing the resolution plan after a first round of bids does not arise. Had the lenders of Reliance Capital chosen the H-1 bidder in the first round itself, then the recovery rate would have been dismal 22%, against the total verified claims of Rs 23,666 crores. 

Now with IIHL and Torrent battling it out and second round of auction being finalised with a reserve price of Rs 9500 crores, the recovery rate for the lenders is expected to be around 50% or may be more.

The Reliance Capital case is not in isolation. There are ample case studies or success stories that establish the fact that if lenders believe that they can get better recovery or maximise the value by negotiating with the bidders or resolution applicants, then their wisdom cannot be questioned.  Binani Cement resolution plan value was upped from Rs 6932 crores to Rs 7950 crores by Ultratech Cement, Essar steel received a counter offer of Rs 42000 crores instead of Rs 32000 crores received in the Round 1 of the auction, Bhushan Power and Steel received a revised offer of Rs 24,500 crores which was  3 times the original offer of Rs 15000 crores. (see below chart)

Even the courts have always established the principle of value maximisation. 

In the matter of Ebix Singapore Private Limited & Ors. v. Committee ofCreditors of Educomp Solutions Limited & Ors, the Supreme Court while observing that CIRP is essentially a creditor driven process stated that:

“the aim of the process, in preferential order, is to: first, enable resolution of the debt by maintaining the corporate debtor as a going concern, in order to preserve the business and employment of the personnel; second, maximize the value of the assets of the corporate debtor and enable a higher pay-back to its creditors than under liquidation; and third, enable a smoother and faster transition to liquidation in the event that a time bound CIRP fails, in a bid to avert further deterioration of value".

Similarly, in the matter of Bank of Maharashtra and Ors. v. Videocon Industries Ltd. and Ors., the NCALT has held that the COC is the custodianof public trust and has to determine feasibility, viability and commercial aspects of a resolution plan and ensure that all the stakeholders are treated fairly in the process.

All these cases are witness to the fact that the wisdom of COC is supreme. If lenders believe that by negotiating with the bidders or conducting auction / swiss challenge process, they can maximise the value of the assets under the resolution process, then they have all the right to do so.

The IBC process has often been criticised as the value destroyer. So, if by following the due process as laid out in the IBC, the lenders can extract maximum value for a particular asset or company, then they should not be blamed for prolonging or delaying the process. The closing of resolution process in a time bound manner in no way means that a good quality asset should be sold at a throwaway price. The companies, buying good quality assets under IBC process, should not be allowed to misuse the system or process that may cause loss to the nation’s banking system.

Prasar Sharma

Columnist The author is Director BW Businessworld Media Private Limited