[Anupam Choudhary is an Associate at Agram Legal Consultants, a law firm based in Mumbai. The views and opinions expressed are those of the author and do not reflect the view of his firm nor do they constitute legal opinion]
Recently, there has considerable debate over whether promoters of insolvent companies can submit bids in the bidding process for their own companies. Recently, the Essar Group had submitted an expression of interest for Essar Steel which is undergoing insolvency process under the Insolvency and Bankruptcy Code (“IBC”).
Upon the enactment of the IBC, insolvency process was initiated against several companies which had suffered severe financial stress assets and were unable to repay their debts. In several cases, the insolvency process was initiated by their creditors and, in some cases, by the companies themselves. Under the IBC, resolution plans are invited to resolve the insolvency and provide a new lease of life to the company. This is where expressions of interest are invited from bidders to bid for these companies.
In this context, the ability of promoters to bid for their own companies generates controversial issues. For example, on certain occasions, it might be that money has been diverted by unscrupulous promoters from companies, or that the companies’ precarious financial position can be attributable to the promoter’s own doing. In such cases, it would be really unfair for the creditors to take a huge haircut and let the promoters have their company at almost no cost at all. There is no disincentive to prevent the promoters from taking undue risk, thereby giving rise to the moral hazard problem.
In this background, the Insolvency and Bankruptcy Board of India (“IBBI”) issued a notification on November 7, 2017 amending the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. As per the notification, the resolution plans submitted before the Resolution Professional should have details of the applicant of the plan such as identity, conviction for any offence, identification as a willful defaulter by any bank, etc. Also, the applicant should disclose details such as persons who will be promoters or in management or control of the business of the corporate debtor during the implementation of the resolution plan and their holding companies, subsidiary companies, associate companies and related parties, if any. The IBBI has therefore stipulated that the past track record of a person submitting a resolution plan will have to be reviewed for creditworthiness and also to ascertain the identity of the person submitting the plan.
This, therefore, effectively suggests that there is no bar on promoters from submitting a plan to revive their own company, thereby settling the earlier confusion on this count. This has been done to prevent promoters from using aliases in the form of shell companies to regain the control of their companies. A proper disclosure mechanism has been put in place for the applicant of a resolution plan.
The Committee of Creditors (“COC”) should choose the best resolution plan, which might very well come from the promoters themselves. The COC should conduct a proper diligence and make sure that the persons who have submitted the plan and would implement the same are credible, to avoid a situation where the company goes into liquidation if it is not able to adhere to the resolution plan. The disclosures have been laid down to enable the COC to assess the credibility of an applicant and to make a prudent decision while considering the resolution plan for its approval.
It would be really unwise of the COC to not accept a resolution plan submitted by a promoter merely because of the fact that it was the promoter when the company had defaulted in paying its debts. There may be a number of situations when stable companies become insolvent due to factors such as increase in production cost, new competition, etc. which may not be primarily attributable to the promoter. What needs to be kept in mind is that the best plan should be chosen, i.e., one that takes care of every stakeholder and maximizes the value of the enterprise, although it might be from the promoters. What also needs to be kept in mind is that in a lot of sectors, sector-specific experience and technical know-how of that sector is very important for running the business. There are a lot of challenges and problems which only a person having experience in that field is suited to address. Therefore, the promoters become most suited to run such businesses and should be relied upon by the creditors.
To conclude, promoters have been allowed from submitting their resolution plan under the IBC provided that they make the necessary disclosures. This is a very well-considered step brought about by the IBBI to also take care of situations where no plans other than those by the promoters are submitted or when the promoters come up with the best resolution plan. At the same time, the stringent disclosures have made it difficult for defaulters to take advantage of the current situation and get away without repaying the creditors.
– Anupam Choudhary