Home / Companies / News /  NCLT disallows second round of auction for Reliance Capital; lenders likely to challenge order

The National Company Law Tribunal (NCLT) on Thursday barred lenders of bankrupt Reliance Capital (RCap) from conducting a second auction of its assets, terming it an “illegal mechanism" to circumvent rules of India’s bankruptcy code.

The tribunal further directed the RCap administrator to conclude the resolution process.

Torrent Investments emerged as the top bidder in the RCap bankruptcy auction with an offer of 8,640 crore. However, Hinduja Group firm IndusInd International Holdings Ltd (IIHL) offered to pay 9,000 crore after the auction ended; when lenders decided to conduct a second auction to determine the winner—called extended challenge mechanism—Torrent moved NCLT.

“The proposed second round of the challenge mechanism is nothing but an act to indirectly achieve what could not have been achieved by adhering to the challenge mechanism in terms of the challenge process note," a bench of justices Shyam Babu Gautam and Pradeep Narhari Deshmukh said.

“We are, thus, of the view that the committee of creditors cannot devise an illegal mechanism to circumvent the scheme of code to indirectly be able to negotiate further with the resolution applicants post conclusion of the statutory scheme of challenge process under Regulation 39(1A)," the bench said.

RCap’s lenders violated section 39(1A) of the Corporate Insolvency Resolution Process (CIRP) by issuing the process note for the extended challenge mechanism, the order said, allowing the Torrent application.

Torrent had asked NCLT to direct the RCap administrator not to consider or submit for evaluation by CoC an “illegally modified resolution plan" of Hinduja Group or any other resolution applicants which is not in compliance with the original challenge mechanism.

Lenders are likely to challenge the NCLT order in a higher court, people aware of the matter said.

The tribunal ordered the RCap administrator and the CoC not to allow any deviation in the highest NPV (net present value) financial proposals of Torrent and IndusInd at 8,110 crore and 8,640 crore, respectively.

Further, the resolution plan of IndusInd, along with the original bid value of 8,110 crore, and not enhanced value, shall be placed before the CoC along with Torrent’s final plan of 8,640 crore, NCLT ordered.

Sonam Chandwani, managing partner, K.S. Legal & Associates, said, “The lenders may approach the Supreme Court as the Hinduja Group’s offer was more lucrative in terms of the upfront payment, and the disparity of approximately 400 crore is significant for banks. Since Hinduja is keen on proceeding with the offer, there is a possibility that even they may approach the top court."

The NCLT bench said that IndusInd’s financial proposal (revised after the conclusion of the challenge mechanism), being in gross violation of the challenge mechanism as well as Regulation 39(1A) & 39(1B) of CIRP Regulations, cannot be done indirectly under the garb of declaring the result of the challenge mechanism as sub-optimal and resetting the clock back to Regulation 36B in derogation of the regulatory intent, especially when the final financial proposal of the applicant was much above the minimum threshold set in the challenge mechanism.

Citing an earlier order by the National Company Law Appellate Tribunal in the Dwarkadhish Sakhar Karkhana Ltd Vs. Pankaj Joshi case, the bench noted that the CoC cannot exercise its commercial wisdom, which is beyond the procedural IBC framework.

On Monday, the NCLT granted the RCap administrator an extension of 45 days to complete the RCap resolution process after the administrator sought an extension of 90 days. The deadline to complete the resolution of the insolvent firm ended on 31 January.

Priyanka Gawande
Priyanka Gawande is a senior legal correspondent at Mint. She has worked as legal reporter for four years with both television and digital mediums. Based in Mumbai, she reports on disputes across sectors including banking, corporates and finance. This also includes insolvency and bankruptcy cases and intellectual property rights (IPR) litigation. Her focus also comprises tracking capital markets and disputes relating to securities law. Previously, Priyanka worked with Informist Media for 2.5 years covering major insolvency and bankruptcy cases and corporate developments. She started her career in journalism with Business Television India (BTVi) where she reported on primary markets, banking, finance and insurance companies.
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