Why ex-promoters are stuck on their bankrupt firms

For businessmen who have built corporate empires from scratch, it is heart-breaking to see them collapse and get reduced to a footnote in history. The reasons for the downfall could be varied: fraudulent activities, genuine demand-supply issues, a sudden change in government policies, contagions, international factors impacting the domestic market, or rapacious promoters or the management. When the reins of the company slip away from their hands, promoters become unnerved and make every effort possible to get them back.

Ever since India’s bankruptcy law, the Insolvency and Bankruptcy Code (IBC) 2016, came into being, several ex-promoters have sprung up with “eye-popping” offers even at the risk of delaying the insolvency process. IBC, touted as a big-bang reform by the then finance minister Arun Jaitley, has established itself as a time-bound process to resolve insolvency and has re-established the liaison between promoters and their companies. The long-drawn process that once failed to offer an economically viable arrangement underwent a complete overhaul. The creditors found the new model attractive as they could gain control over the debtor’s assets in the event of a default in repayment and the new regime allowed both debtor and creditor to start “recovery” proceedings against each other. The winding up procedure is now under the supervision of the National Company Law Tribunal (NCLT), which is supposed to provide quick and prompt action soon after the default so that the company gets the best recovery rate.

Ex-promoters who were forced to exit the boards of the troubled companies occasionally tried to bounce back with “sweet offers” that were clearly meant to entice lenders. A few lenders were swayed as the package offered by the former owners looked like a fortune, overshadowing what they had managed to sew up during the insolvency process. In several cases, the lenders had ended up taking a haircut as deep as 90%.

When the Ruias, former promoters of Essar Steel, continued to improve their offers desperately, there was mayhem. They made a last-ditch attempt in October 2018 to save the asset by offering to pay back lenders the full ₹54,550 crore. But the committee of creditors (CoC) approved ArcelorMittal’s ₹42,000-crore bid. In May 2019, the National Company Law Appellate Tribunal (NCLAT) even pulled up the Ruias for their application to reject ArcelorMittal’s bid, saying such steps were stalling the company’s insolvency resolution process. “Where were you for the last so many months? Why did you not challenge or appeal against the order allowing [the] ArcelorMittal bid? You have been present throughout the proceedings, why were you waiting to intervene at this stage?” a two-judge bench asked the Ruias.

This has, however, not deterred ex-owners. Some offered to match or better the deal proposed by potential buyers and accepted by the CoC, while some others forced creditors to take a massive haircut in order to gain control using a front company.

The government’s move to introduce an amendment in 2017, Section 29 A, to check attempts by promoters of insolvent companies to regain control, didn’t dissuade ex-owners, too.

In March 2021, the Supreme Court denied defaulting promoters a back-door entry by using a special provision of compromise or arrangement during the liquidation phase of the insolvency proceeding. The apex court said a promoter, who is barred from bidding for his/her company undergoing insolvency proceedings, cannot also take control of the company back by using the provision of ‘scheme of arrangement’ under Section 230 of the Companies Act.

The apex court made Arun Kumar Jagatramka, who was promoter of Gujarat NRE Coke, ineligible to negotiate with creditors of the debt-ridden company. It dismissed a petition filed by Jagatramka, who had moved the court against an order of the NCLAT making him ineligible for proposing a scheme of arrangement or compromise.

The Siva Industries and Holdings Ltd (SIHL) case, however, is a curious one. Lenders to SIHL, the holding company of the Siva group promoted by C. Sivasankaran, are a divided lot as they head for a settlement with the promoter. With no bidders in sight, the creditors, which include State Bank of India and Malaysia’s Maxis Communications, have accepted Sivasankaran’s offer to pay them ₹500 crore in return for cancelling all outstanding claims (of ₹5,000 crore) and withdrawing legal proceedings against the company.

Experts believe that this was done against the spirit of Section 29A of the IBC, which states that an insolvent, a wilful defaulter, or a person who was a promoter or was in the management of the corporate debtor would not be allowed to bid for the insolvent company concerned.

In another case, Venugopal Dhoot, chairman and MD of the suspended board of Videocon Industries, had offered to pay ₹30,000 crore to lenders to settle their outstanding loans and pull out 13 Videocon group companies from insolvency proceedings. The Mumbai bench of the NCLT had clubbed 15 group companies to speed up the resolution process as well as ensure better valuation. The Dhoot family’s settlement offer was for all 13 group companies—including Videocon Industries, Videocon Telecommunications, and Electroworld Digital Solutions that are currently under the resolution process, barring two group companies.

Dhoot wasn’t successful in his effort. In January 2021, the lenders decided to sell the Videocon group’s assets to Twin Star Technologies, a Vedanta Group company, at less than ₹3,000 crore, which amounted to less than 10% of group’s ₹46,000-crore debt.

The two recent developments were Kapil Wadhawan, former promoter of Dewan Housing Finance (DHFL), and Manoj Gaur, executive chairman of Jaiprakash Associates Ltd, approaching the NCLT with proposals to win back their companies.

DHFL, a troubled mortgage lender and the first finance company in India to undergo the insolvency process, presented a strange situation. The lenders as well as the successful bidder (the Piramal Group), and the Reserve Bank of India (RBI)-appointed administrator, separately moved the NCLAT against an NCLT order that directed the lenders to consider Wadhawan’s settlement offer and got a stay on May 25. They all claimed that the NCLT order would cause havoc with the IBC process and, hence, must be stayed.

The NCLT order, which asked the committee of creditors (CoC) to meet and discuss Wadhawan’s proposal, had come as a shocker since it came a few months after the lenders initiated a takeover bid and voted in favour of the Piramal Group, which was eventually approved by the RBI in February.

Why did then the NCLT ask lenders to take a close look at the Wadhawan’s fresh proposal at the eleventh hour? Wadhawan, an accused in the YES Bank loan bribery case, had proposed a 100% payment to DHFL’s creditors, including the holders of non-convertible debentures and fixed deposits, to win back his company. The Piramal Group, which had emerged as the winner for DHFL following an aggressive bidding war, had offered ₹37,250 crore, which amounted to a loss of 59%. DHFL owed around ₹91,000 crore to various creditors.

Wadhawan believed that lenders could not refuse his final offer that came without any haircut. Rohan Dakshini of Rashmikant and Partners, who represented Wadhawan, said the offer was ₹50,000 crore higher than what the Piramals offered. But Wadhawan could not go beyond NCLAT.

Meanwhile, Manoj Gaur of Jaiprakash Associates, in a letter to the creditors dated May 23, offered to settle the ₹9,783 crore owed to banks and other institutions by way of upfront payment, land swap, and long terms debentures with a total value of around ₹12,500 crore. He said the creditors should consider his settlement plan in the interest of homebuyers. According to him, the deployment of funds for home construction was to be of ₹1,650 crore, of which ₹400 crore would be upfront. Besides, additional benefits including delay compensation according to terms of sale would be ₹2,987 crore.

However, the lenders dismissed Gaur’s plea to allow him to bid for the debt-laden company through a one-time settlement. Homebuyers, who are annoyed by an indefinite delay caused by the promoter, constitute a majority of the debt, and are opposing any such bid.

IBC has held out hope, though the total number of successful closures stood at 41%--only 1,045 cases had been closed of the 2,542 cases admitted till September 2019, as per the Economic Survey released on January 31, 2021. Of course, the average time taken to close cases has come down drastically when compared to the pre-IBC days. It's still a long way to go.

Can these cases be closed without any delay? Yes, only if the ex-promoters stay away.