A source of conflict has been stemming from competing bidders raising objections to the selection of a resolution plan
The resolution mechanism under the Insolvency and Bankruptcy Code, 2016 (IBC), was operationalized to address the burgeoning non-performing asset (NPA) crisis in the country. Since its enactment, the IBC has been going through a trial by fire that is perhaps unprecedented. Its theme is the need to present an efficient method to resolve financial stress while safeguarding the interests of various stakeholders. While the objective of efficiency has been addressed in the code, the objective of balancing the interests of stakeholders has given rise to a host of discussions.
Indeed, IBC provisions attempt to weave in fair play and an equitable balancing of interests in the process. The legislative review committee has furthered this objective by addressing the concerns of home-buyers who were otherwise getting a raw deal. Nonetheless, while any law can set the floor on the standards of fair practice, it often cannot by itself address all questions of conflict of interest, especially in cases of bankruptcy where widely conflicting interests are a foregone conclusion. The onus of giving effect to a “fair resolution" then falls on the participants—who are primarily the insolvency resolution professional and the committee of creditors (CoC).
The resolution professional facilitates the administration of the process and is mandated to ensure information symmetry. While recent experience suggests that all the disagreements relating to the process find their way to the doorstep of the resolution professional, it would be remiss to ignore the fact that the selection of a plan from several resolution plans rests with the CoC and not the resolution professional. The resolution professional does not have the power to qualitatively assess plans on the basis of fairness and a balancing of interests beyond the stipulations under IBC, to eliminate plans on this basis.
The financial creditors (mostly banks and financial institutions) are undoubtedly the key drivers for the selection of the resolution plan who negotiate and determine it. As they are answerable to their depositors and investors, they must strive to maximize recovery.
This leaves the other stakeholders in a precarious position—for instance, employees and trade creditors may fear the risk of being squeezed out of a plan which could offer better terms to the majority financial creditors as they are the ones who will determine the fate of the company.
Employees have voiced their concerns of job loss repeatedly and found themselves before the National Company Law Tribunal (NCLT). In some cases, the outcome has been encouraging and the NCLT has ordered the liquidation of the company as a going concern to mitigate job loss. Another class of creditors—trade creditors—has seen resolution plans favour some key trade creditors over others depending on their criticality to the company’s business. It would appear that such stakeholders, who have little or no say in the outcome of the process, would inevitably find themselves seeking recourse before the NCLT to have their concerns addressed, given the lack of avenues to represent their cause before the resolution professional or the CoC.
Another source of conflict has been stemming from competing bidders raising objections to the selection of a resolution plan. While the broad commercial parameters for evaluating plans can be prescribed, the subjective element in evaluating plans cannot be ruled out. In the face of such subjectivity, allegations of unfair preference are perhaps inevitable. Furthermore, the determination on the basis of payouts is likely to be based on the payout to the voting financial creditors and not the employees and trade creditors, which risks the wish list of other stakeholders being left out of the negotiation room.
In such a case, one key question that jurisprudence will need to address is whether financial creditors have any duty, legal or moral, to balance the interest of other stakeholders. An affirmative answer to this question may leave the CoC as the conscience-keeper of the corporate resolution process. This is an unenviable position for any participant with an interest in the process but in the case of creditors, even more so, given the rising pressures of resolving distressed assets and the media attention focusing on scams in the banking sector, which has heightened reputational risks. On the other hand, a negative answer to this question may result in the process not leaving any option for other stakeholders except approaching the NCLT, which is likely to put such stakeholders at a significant disadvantage and adversely impact the efficiency of the process.
As with bankruptcy laws in other countries, it is up to the judiciary to either represent the cause of fairness or develop jurisprudence to task other participants to further this cause. Fortunately, it is abundantly clear that the bedrock of IBC is that the outcome of the process is binding on all stakeholders. While this is a legislative mandate, the participants recognize that practically, too, the success of a plan will hinge on implementation that benefits all stakeholders on a sustained basis.
Therefore, the participants driving the process should be incentivised to work towards ensuring that the interests of all stakeholders are balanced at least to the extent needed to mitigate a dispute—and enable a defence of the process should such a challenge arise.
Amrita Sinha and Zubin Mehta are banking and insolvency lawyers at Veritas Legal.