Why Binani Cement deal is a test case for Insolvency and Bankruptcy Code

Dalmia Bharat was declared the highest bidder for Binani Cement by the committee of creditors (CoC) in March beating UltraTech, which bid marginally lower. Photo: Bloomberg

Fourteen petitions. That’s the number of pleas filed against the insolvency proceedings of Binani Cement Ltd, which is fast turning out to be a test for the Insolvency and Bankruptcy Code (IBC) due to multiple issues ranging from allegations of fraud to lack of transparency in the bidding process. Hearings are currently underway at the Kolkata bench of the National Company Law Tribunal (NCLT).

1. What’s the background?

Binani Cement was a regular bankruptcy case under IBC. Bids were called for, and the committee of creditors chose a Dalmia Bharat Ltd-consortium as the winner. The resolution professional had also filed the Dalmia Bharat resolution plan with the tribunal. However, UltraTech Cement Ltd, which had also put in a bid for Binani Cement, alleged that the process for choosing the top bidder was not transparent and that the resolution professional had not followed established best practices.

2. What did UltraTech do then?

It complained to NCLT and also wrote to Binani Cement’s resolution professional, offering to increase its bid to about Rs6,900 crore from about Rs6,200 crore earlier. But when that was not accepted, the firm struck a deal with Binani Industries Ltd, the parent of Binani Cement, to buy its 98.43% stake in the cement unit, provided the insolvency case was terminated. On its part, Binani Industries approached NCLT asking that the case be terminated. At a hearing last week, Binani Industries told the tribunal that it will repay creditors within two weeks.

3. Why is this important?

UltraTech has struck this deal outside the bankruptcy framework. Striking a deal outside the framework, especially when the process is nearing completion, tests the sanctity of the code. If UltraTech wins, every unsuccessful bidder could approach the promoter and strike a deal to fund the repayment of the liabilities with the banks.

4. What does the law say?

The code itself does not have a procedure laid down for terminating the insolvency process. However, in another case last July, the Supreme Court ruled that a settlement can be considered and a case can be withdrawn after insolvency proceedings have started against a company. In that particular case, the company and its creditors had settled their dispute.

5. What next?

The committee of creditors has indicated its willingness to consider the UltraTech-Binani Industries deal since it would entail a lower sacrifice on the lenders’ part. Its counsel had sought time till Monday to consider UltraTech’s offer. If the lenders do choose to accept the offer, the Kolkata NCLT will have to rule. An adverse ruling for Dalmia may prompt the consortium to approach higher courts. If the case ends up at the Supreme Court, its ruling could set a precedent for other cases. Expect the drama to continue.