As bankruptcy proceedings kick off, promoters look to stay in the game
Taking charge as governor of the Reserve Bank of India (RBI) in September 2013, Raghuram Rajan asserted that promoters do not have a divine right to stay in charge regardless of how badly they mismanage their companies. Rajan was making the point that loan defaulters need to pay a price.
Nearly four years on, as lenders prepare for bankruptcy proceedings against 12 of their biggest defaulters, the promoters may be looking to stay involved in their companies’ operations—even as employees—during the bad-loan resolution process, said two bankers and four lawyers involved in these cases, who didn’t want to be named.
Even the creditors may prefer it that way.
Take the case of Amtek Auto Ltd, where two board members—vice-chairman and managing director John Ernest Flintham, and independent and non-executive director Sanjiv Bhasin—stepped down on 23 June, only to return the following day in the operational role of company presidents. Amtek Auto declined to comment for this story.
Section 20 of the Insolvency and Bankruptcy Code (IBC) vests an insolvency resolution professional (IRP) with management control; the board gets suspended.
The chosen professional may not always have the expertise or skill set required to run a firm, especially in these 12 cases the RBI has referred to their creditors to launch bankruptcy proceedings.
“In case of distress, we have seen investors exiting the board, not the promoter directors,” said Aashit Shah, partner at law firm J.Sagar Associates.
“In cases, where the IP (insolvency professional) is appointed and board members exit, my guess is that they would not want to be liable in case something goes wrong during the interim. At the same time, assuming another role could mean that they would like to remain involved and be aware of the daily developments,” he added, without referring to any particular case.
The 12 companies chosen for bankruptcy proceedings, which account for a quarter of the banking system’s non-performing assets, are entities with large operations.
The time-bound nature of the resolution process also makes it difficult for an insolvency resolution professional to initiate radical changes in the day-to-day functioning of a company as well as remove key personnel.
After consulting all stakeholders, the professional has to come-up with resolution plan and this must be implemented within 180 days (with an option for a 90-day extension). In case there is no resolution plan or it is not accepted by the creditors, the company will go into liquidation.
For promoters, assuming the role of employees will not only keep them close to their business operations but also to the resolution process. Banks and lawyers say the fear of insolvency has instilled a sense of discipline in promoters.
Bharati Defence & Infrastructure Ltd is one such insolvency case where Dhinlal Shah, an Ernst & Young executive, is the insolvency resolution professional.
Shah has set up a steering committee, which includes the management of Bharati Defence, to run daily operations, according to two people aware of the matter.
Additionally, he has also appointed 10 external officials in various departments of the company.
Shah declined to comment for this story.
“As per the Indian Bankruptcy Code, the IRP will take management control of the company. However, at present, the lenders leading the discussions have asked us to work on the assumption that the promoter is integral to the process,” said Uday Bhansali, president-financial advisory, Deloitte India.
Lawyers said that given the specific timeline that has to be followed under the proceeding, it is imperative that all stakeholders co-operate in decision making.
“During a resolution process, it is very important that the corporate debtor remains in a ‘steady state’ to derive maximum value for all stakeholders. In order to do this, and particularly for heavily regulated hard asset industries such as steel and power, it is quite likely that the insolvency professional will request the existing management to continue. This is not a concept alien to the world of restructuring,” said Ashwin Bishnoi, partner, Khaitan & Co.
According to Manoj K Singh, founding partner of Singh & Associates, given the time-bound resolution, it is only in the best interests of the companies themselves to coordinate with IRPs and attempt to revive their businesses. The law firm is an advisor to Era Infra Engineering Ltd, which is one of the 12 identified cases.
Jayshree P. Upadhyay contributed to this story.