It is a truth universally acknowledged that laws will always have loopholes, for without such loopholes, lawyers would soon be out of work. But to see such a truth demonstrated in such a spectacular fashion as we are now seeing in the case of the Insolvency and Bankruptcy Code (IBC) is both breathtaking and disheartening.

The IBC was notified less than two years ago, and has already seen one set of amendments. Be that as it may, we still expected that the fledgling code would do what it was created for: resolve cases where companies have gone bankrupt leaving behind mountains of debt. The idea was to call for bidders to take these insolvent companies or their assets.

A laudable plan, except that there’s already trouble in the case of the first few companies under the IBC—Bhushan Steel, Bhushan Power and Steel, Essar Steel, and Binani Cement. In the case of Bhushan Steel, its employees have approached the National Company Law Tribunal (NCLT) objecting to Tata Steel’s resolution plan. For Bhushan Power and Steel, one of the bidders Liberty House has challenged the rejection of its bid. (Liberty House’s bid was rejected because it submitted after the deadline; it contends that since the bid was put in before the other bids were opened, it should be valid.) The Essar Steel case resulted in the IBC being amended to bar former promoters of the company from bidding.

So far, so bad, but it is the recent Binani Cement case that could see the entire process under IBC under a cloud of uncertainty.

On Monday, Aditya Birla Group’s UltraTech Cement announced that its board agreed to issue a letter of comfort to Binani Cement’s promoters for acquiring a 98.43% stake in the company for Rs 7,266 crore. The transaction, if approved, will be outside the purview of the NCLT and the insolvency process that Binani Cement is currently undergoing.

This happened after UltraTech’s bid of Rs 6,500 crore for Binani Cement’s assets under the insolvency process was rejected as it fell short of a Rs 6,750 crore bid by a consortium of Dalmia Bharat, Piramal Enterprises, and Bain Capital. UltraTech sought to revise the bid on March 7. That was unsuccessful, so it seems to have decided to approach the promoters of Binani Cement directly.

On receipt of the letter of comfort, Binani Industries, promoter of Binani Cement, approached the NCLT seeking to terminate the insolvency proceedings.

It seems like a straightforward process. But, of course, there’s a catch. The insolvency process for Binani Cement is at a very advanced stage. On March 14, the Dalmia Bharat-led consortium won the bidding for Binani Cement, and a resolution plan, accepted by the Committee of Creditors, has been submitted to NCLT. A performance bank guarantee of 10% of the bid amount has been paid to the financial creditors.

Who is in the right? Legal opinion is divided. Purely on the basis of logic, UltraTech’s case, however late the approach, seems strong. It offers lenders a chance to recoup the entire amount lent to Binani Cement; shareholders will also get a return on the equity they hold.

With much on both sides, the case could soon reach the Supreme Court. The reason is because if anyone, including the Resolution Professional or NCLT, picks sides, allegations of graft or favouritism will soon follow. If the matter reaches the apex court, the decision will set a precedent for all future insolvency cases.

Allowing UltraTech’s approach could be akin to saying that the entire insolvency process under the IBC is worthless. That said, the government has a great example in the Ministry of Coal. The auction process for coal mines forms a good example for how questions of graft or favouritism can be completely eliminated. Bidding for coal mines is completely transparent and the final monetary value of the bid can be viewed by anyone. It is almost like sitting in a virtual auction house where every participant knows what the other is bidding and therefore can take a more informed decision.

The next few weeks will reveal whether or not there is any sanctity to the insolvency process under the IBC or whether the best way to sell bankrupt assets is through stoking the animal spirits of corporate India in a free for all auction.

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