As if belligerent promoters of defaulting firms weren’t enough of a headache for Indian bankers, the buyers of these companies are now turning rogue. UK-based Liberty House has reportedly failed to honour the payment it had promised lenders as part of the resolution plan it submitted after winning bids for two insolvent firms—auto component maker Amtek Auto Ltd and steelmaker Adhunik Metaliks Ltd.
In all, a little over ₹ 5,000 crore was the slip between the cup and lip for bankers in these two cases. They were promised the money but the cheque didn’t arrive, according to news reports.
Did the creditors not establish the credentials of the company or did Liberty House conclude these assets weren’t worth it after all? Amtek Auto involves a haircut of 67% for lenders and for Adhunik Metaliks, the haircut is even higher.
Media reports suggest Liberty House wants all litigations involved in various courts to be resolved before going ahead with the deal. Whether this was part of the agreed resolution plan with the creditors is unclear. If it was not, then bankers are right in demanding payment on the due date.
But how did bankers find themselves in this situation?
Under the Insolvency and Bankruptcy Code (IBC), the credentials of a bidder are examined on the basis of the soundness of the resolution plan and proof of funding that the company would bring. The bidding company does its due diligence over the asset under insolvency.
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But there is no need felt to determine whether the bidder is bona fide beyond the stipulation that the bidder should not be related to the defaulting promoters. Now perhaps, bankers may not take proof of funding at face value either.
Liberty House, which is run by Indian origin businessman Sanjeev Gupta, came under the scanner when it began bidding for defaulting companies. At one point, bankers suspected it was a front for the promoters of the defaulting firms, prompting Gupta to deny this.
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In fact, to be eligible to bid for Amtek Auto and ABG Shipyard Ltd, Liberty House had to clear its dues with Exim Bank.
Gupta had come under the scrutiny of banks when he placed a bid for Bhushan Power and Steel Ltd. A committee of creditors disqualified Liberty House after it failed to provide critical information on funding arrangements despite repeated reminders.
Lenders would be better off demanding that the company honour payments rather than setting a precedent that allows successful bidders to renege on their commitments. The latter threatens to undermine an already slowing resolution process under IBC.