Home / Companies / Promoters look to stay close as firms begin insolvency process

Promoters of some companies where insolvency and bankruptcy proceedings have been triggered are taking on operating roles to remain close to the action when the insolvency professional takes over.

Take, for instance, Bhushan Steel Ltd, one of the 12 companies which the Reserve bank of India has identified for triggering the Insolvency and Bankruptcy Code. On 5 July, Neeraj Singhal, its vice-chairman and managing director, took on a chief executive officer’s (CEO’s) role. The same day, two other directors, Rahul Sen Gupta and P.K. Aggarwal, added executive vice-president roles to their profiles, the company said in a notice to stock exchanges.

Similarly, Era Infra Engineering Ltd, another bankruptcy candidate, said in a 3 July notice that its managing director Hem Singh Bharana was given additional charge as CEO to supervise and manage the operations of the firm.

“Before the board is suspended, companies are looking to strengthen executive management to assist the IRP (insolvency resolution professional) in managing the affairs of the company during the resolution process," said Kumar Saurabh Singh, partner at law firm Khaitan and Co. “Considering the early stage of development of the insolvency market in India, this may be an Indian version of creditor-in-possession model to avoid disruption and preserve value of the distressed unit."

Under the insolvency code, the resolution professional gets management control and the board is suspended during the resolution process. However, the time-bound nature means the resolution professional may be hamstrung in making large-scale personnel changes.

Bhushan Steel and Era Infra spokespersons didn’t respond to calls and text messages seeking comment.

Such action isn’t without precedence. As Mint reported on 30 June, two board members of Amtek Auto, 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.

Some experts argue that such a move by promoters could lead to a conflict of interest.

“Having promoters stay on in the executive role may be important to maintain the going concern of the company under insolvency resolution. At the same time, it may cross the thin line of conflict in the resolution process," said Rakesh Nangia, managing partner, Nangia and Co. Llp, which does some insolvency work. “Alternatively, instead of giving a decision-making role after IRP takes over, the promoters could be given the role of an adviser, counsellor, consultant or similar position in helping the IRP in the management of the company."

Others said that promoters are fighting a losing battle.

“Currently, everyone is waiting to see how the regulations pan out and are positioning themselves in ways that are testing the regulations on what they can get away with. But these are short-term means and measures. They might win the battle but lose the war," said Amit Tandon, founder and managing director, Institutional Investor Advisory Services, a proxy advisory firm.

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