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Banking Central | The curious case of Videocon insolvency

The insolvency and bankruptcy code was designed to ensure a meaningful recovery for banks in a time-bound manner and give a graceful exit to promoters but some recent cases have exposed loopholes that allow former promoters to get back control of their businesses

August 02, 2021 / 10:58 AM IST

The insolvency and bankruptcy code (IBC) faces yet another test as promoter Venugopal Dhoot has challenged the National Company Law Tribunal’s (NCLT’s) decision allowing Anil Agarwal’s Twin Star Technologies to take over the Videocon group of companies.

Dhoot has invoked Section 12 A of IBA that allows the committee of creditors (CoC) to withdraw the insolvency case and consider the promoter’s settlement offer. Dhoot claims the settlement offered by him will be far higher than what Twin Star has agreed to pay the creditors.

NCLT agreed to a Rs 2,962-crore takeover by Twin Star but Dhoot challenged the order in the National Company Law Appellate Tribunal (NCLAT), the outcome of which is being closely watched for the template it will offer for other such cases.

Before getting into the specifics of the Videocon case, here is some context. The insolvency and bankruptcy code was introduced to enable a time-bound resolution for banks stuck in loan default cases and, at the same time, provide a graceful exit to the promoter.

Earlier, it used to be a tug-of-war between banks and promoters. A prolonged legal battle, spread over several years, meant the value of underlying assets deteriorated, leaving little for the lender to recover at the end.

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IBC promised a change. Since its introduction in 2016, there have been some big cases where resolution has happened but, the recovery, as highlighted by this column, has come at a steep cost for banks.

Banks have had to take an average haircut of 60 percent in these cases, meaning they got back only Rs 40 for every Rs 100 that they had lent.

Also read: Banking Central | Is Section 29A being abused, hobbling IBC?

The 12A loophole

As reported by Moneycontrol, banks and other financial creditors recovered Rs 13,706.32 crore from six of the large assets referred for resolution under the Insolvency and Bankruptcy Code between June 2020 and June 2021.

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Apart from the dismal recovery track record, there is also the question of whether former promoters should get a second chance to offer a settlement for IBC companies. There have been rising instances of old promoters using legal loopholes to get back the control of their companies from IBC courts.

Banks can withdraw NCLT cases under Section 12 A and accept a one-time settlement offered by the promoter. There is nothing illegal here but, according to some legal experts, it dilutes the spirit of Section 29A, which bars former promoters from bidding for the same assets.

In the Videocon case, CoC is not in favour of the former promoter. Dhoot, however, has submitted a proposal under section 12 A, under which, with the agreement of 90 percent of the lenders, the proceedings can be withdrawn to consider a settlement offer from the old promoter.

The same clause was used by CoC to withdraw the insolvency case against Siva Industries Holding Company Ltd (SIHL). Against dues of Rs 5,000 crore, the former promoter of SIHL offered a settlement of around Rs 500 crore. The NCLT is yet to approve the deal.

In the Videocon case, will the NCLAT rule against NCLT? Even if that happens, will CoC agree to Dhoot’s settlement offer? In the past, NCTL has rejected Section 12 A pleas in Essar Steel and DHFL cases.

It remains to be seen how Videocon plays out but it is obvious that Section 12 A has emerged as the favourite route for many powerful promoters to get control back in their bankrupt companies.

Dhoot, in his petition to NCLAT, has requested that the NCLT order be set aside and lenders directed to consider the Rs 31,789-crore settlement plan submitted by him. Videocon Industries and its 12 group companies owe Rs 64,838.63 crore.

Confidentiality angle

Dhoot has also questioned the role played by the resolution professional and said he should have mentioned the foreign oil and gas assets of the group in the information memorandum to all the bidders.

He also demanded that it should be ascertained if the liquidation value was leaked to Twin Star. The confidentiality of the process itself has been questioned.

NCLT had said “doubt arises upon the confidentiality” over the liquidation valuation of the assets of the Videocon Industries during the insolvency process as the successful bidder also “arrived at almost the same value”.

What happened during the process? The question of confidentiality, along with the promoter's appeal to invoke Section 12 A, is an important turning point in this case. NCLAT ruling will be closely watched.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
Dinesh Unnikrishnan is Deputy Editor at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
Tags: #Videocon
first published: Aug 2, 2021 10:58 am

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