Since the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC), a large number of corporate debtors rather than seeing revival have been pushed into liquidation. In case of an engineering, procurement and construction (EPC) firm, the value of its business as a going concern is largely driven by the three core assets: (a) “PQs (pre-qualifications)" being technical qualifications/credentials, on basis of which an EPC firm qualifies to bid for infrastructure projects; (b) “order book" representing the ongoing infrastructure projects, which also represents future receivables of an EPC firm; and (c) “key personnel" being personnel/staff, who have the requisite expertise for implementing the project.
The immediate fallout for an EPC firm undergoing insolvency process is as follows:
A. Most EPC project contracts/agreements (project agreements) provide for clauses which enable their clients to terminate such project agreements upon any commencement of insolvency, bankruptcy and / or winding – up proceedings for an EPC company. Therefore, ongoing project agreements generally become the subject matter of termination and termination-related disputes, by clients on account of the occurrence of an insolvency event of the EPC company. Upon termination of a project agreements, clients of EPC companies invoke their performance bank guarantees thereby further increasing their liabilities and the financial exposure of the creditors;
B. Given the takeover of the management by the resolution professional, the EPC company is unlikely to bid for any infrastructure projects, using its PQs, as it increases the liability of the EPC company; and
C. It creates uneasiness among key personnel and such key personnel often decide not to continue their engagement with such companies. Large-scale departure of key personnel severely impacts the execution of ongoing projects, which in turn results in termination of contracts by clients and invocation of the bank guarantees.
In contrast to an asset-heavy company, the core assets for an EPC company are the PQs, the order book and the key personnel and the overall value of an EPC company is largely dependent on these core assets. Therefore, resolution applicants looking to bid for an EPC company face issues with regard to arriving at an accurate valuation, given that its order book is likely to deplete and the continued association of several key personnel may also be in question.
For the prospective resolution applicant of an EPC company, the value of the PQs is inextricably linked to the key personnel.
Since several companies in this industry sector are already reeling under financial stress, finding a suitable ‘white knight’ may prove to be difficult for the resolution professional and the committee of creditors (CoC), since they may be disqualified under Section 29A of the IBC. The aforementioned complexities and issues surrounding the insolvency resolution of an EPC company severely limits the number of prospective resolution applicants during the insolvency process. The CoC may therefore order such EPC company to be liquidated. These complexities and issues would also persist during liquidation.
In case of liquidation, it may be advisable that the liquidator causes the “sale of the corporate debtor as a going concern" as the same has now been permitted under IBC. In this regard, the liquidator shall, with the concurrence of the CoC, be required to obtain direction of the National Company Law Tribunal, to continue to manage the affairs of the said company as a ‘going concern’ till the consummation of sale of such corporate debtor as a going concern.
In light of the complexities pertaining to insolvency and liquidation of an EPC company, lenders would have to evaluate on a case-to-case basis whether invocation of IBC would be advisable as compared with resolution outside IBC, which has been undertaken for Patel Engineering Ltd, Hindustan Construction Co. and Gammon India Ltd. Further, the outcome in the cases of Coastal Projects Ltd, IVRCL and Era Infrastructure, which have been admitted under IBC, will be of guidance to lenders in invoking IBC.
Ajay Shaw is partner at law firm DSK Legal.