NCLT okays first insolvency resolution scheme under IBC
Mumbai: The National Company Law Tribunal (NCLT) on Monday pronounced the first insolvency resolution order under Insolvency and Bankruptcy Code, 2016, in the matter of Synergies-Dooray Automotive Ltd, a maker of alloy wheels for cars.
The company’s plea for insolvency was admitted on 23 January. The resolution plan was submitted to NCLT on 21 July, within the 180-day period as envisaged by the code, and the tribunal approved the plan on 2 August. The final order was uploaded on the NCLT website only on 14 August.
The bankruptcy law, which was passed by Parliament in May 2016, came into effect from December, superseding other existing laws to tackle bad loans and non-performing assets (NPAs) in the system.
NCLT is the judicial body overseeing the entire process. It takes 14 days to either reject or accept an insolvency plea filed by financial or operational creditors. After an application is admitted, the tribunal appoints an insolvency resolution professional (IRP) to come up with a resolution plan within 180 days (extendable by 90 days). For these 180 days, the board of the company stands suspended, and the promoters do not have a say in the management of the company although the IRP can seek the support of the company’s management for day-to-day operations.
The total claim amount against the Vishakhapatnam-based Dooray from financial creditors, including three asset reconstruction companies (ARCs) stood at Rs972 crore and the cost of the proposed scheme is Rs54 crore.
The financial creditors involved in the proceedings are Alchemist ARC Ltd, Edelweiss ARC Ltd, Synergy Castings Ltd and Millennium Finance Ltd. Edelweiss took over the debt from EXIM bank.
The proposed scheme as per the NCLT, Hyderabad order involves merging Synergies-Dooray with Synergies Casting, a creditor and so-called related party. It also involves financial restructuring of the dues of financial and operational creditors, payment of dues to the government, and an infusion of capital (including equity) from the promoters.
The resolution plan is to be funded against receivables from other corporate debtors and through operations. The payments to the creditors and the government will be staggered over the next three years at a deep haircut, where only the principal amount will be paid.
“There were three resolution plans out of which one was selected. The other two plans had good money in them, but the companies infusing capital were from a trading background. We went with the plan which had some manufacturing background to keep the company as a going concern,” said Mamta Binani, the Insolvency Resolution Professional for Synergies-Dooray and past president of Institute of Company Secretaries of India (ICSI). “Putting in money is not the end of it.”
While it might be reading too much into one insolvency resolution order, albeit the first, the Dooray case does indicate that creditors may want to keep a company running.
“The selected plan also takes care of dues of operational creditors and the government, which is generally not the case when the liquidation value is zero. We are increasingly seeing that committee of creditors are conscious of the dues of operational creditors, as these are mostly small and medium enterprises and if their dues do not get paid then the companies can go under and overall hurt the economy,” Binani said.
“The new IBC allows companies that have an opportunity to revive a second chance, to dis-incentivise a minority creditor from disrupting the majority creditor view, and forces decisions in a system where there is no incentive or penalty for inaction/indecision. These are the real virtues of the new IBC. The Synergies Castings revival of Synergies Dooray, a firm whose rehabilitation was objected to by a 8% minority’s creditor for 10 long years, which demonstrates both what was wrong about the previous system, and what is right about new IBC. Revival also demonstrates that IBC is not merely about liquidation but revival, which indeed should always be the first preference for all stakeholders, including creditors,” said Sekhar Movva, president of Synergies-Dooray in a text message late on Tuesday.
According to the NCLT order, the merged entity will be exempt from stamp duty. The interest, penalties on sales and service tax will also be waived by the Andhra Pradesh government.
Edelweiss ARC, one of the creditors of the company raised objections to the plan alleging that Millennium Finance Ltd was wrongly included in the committee of creditors and that it was a related party. NCLT dismissed the objection and said the IRP, under the provisions of the bankruptcy code, does not have the power to address disputes among creditors.