The Reliance Capital (RCAP) corporate insolvency resolution process brings to the fore the conflict between the twin principles of value maximisation and time-bound resolutions enshrined in the Insolvency and Bankruptcy Code (IBC). The case, which has already seen three extensions, is set for further delay as the committee of creditors is pressing for a second round of auction in the hope of getting improved bids.
However, some lawyers Moneycontrol spoke to said that even though the lender gets to take the final call it might make sense to focus on a time-bound resolution since delays could lead to depreciation of assets and an erosion in value.
“The sanctity of timelines under the Code are of utmost importance because in most of the cases, the delay in resolution of the Corporate Insolvency results in depreciation of assets and erosion of valuation of the Corporate Debtor,” said Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors. “Therefore, in a sense, the purposes for maintaining sanctity of timelines under the code is also value maximization.”
Bajaj also said that while maintaining the sanctity of timelines is important the final call rests with lenders, pointing out that the Supreme Court had held the commercial wisdom of lenders to be paramount.
But how far can lenders continue to extend the process? Experts warned that if extending timelines becomes a norm, it may work against the code.
Niraj Kumar, Partner, DSK Legal said: “…it is essential that consideration/acceptance of belated bids/plans ought not to become the norm, and firmly remain the exception-based solely on the upside in value, which may justify a more flexible approach vis a vis process timeliness.”
The CoC also undermines its own process and raises questions about transparency when it presses for a second round of auctions. In a column written after the Dewan case, lawyers Rajat Sethi and Tanya Aggarwal of S&R Associates argued that if the sanctity of timelines aren’t maintained, “serious bidders will be deterred from participating and any litigation on account of alleged procedural lapses will prolong the process, waste public funds and ultimately harm the corporate debtor and the public.”
A glaring example of this is Oaktree walking out of the bidding process for Dewan Housing Finance Ltd.
In a letter to the committee of creditors of DHFL and the Reserve Bank of India, it wrote: “Bidders need to be comfortable that bidding is being conducted within the context of a fair, transparent and reliable process, both in perception and fact. Processes run in reliable and developed markets define clear parameters for a transparent structured process which are strictly adhered to, creating certainty for bidders and thus maximising value. Breaches in confidentiality and opaqueness undermine this certainty, discouraging good faith bidders from participating and encouraging tactical bidding which does not lead to value maximization.”
RCAP is not the first company undergoing the corporate insolvency resolution process to see delays. Earlier high-profile cases such as Binani Cement and Dewan Housing Finance Ltd also said their timelines extended and bidders engaged in litigation.
In RCAP’s case, after Torrent Investments made a winning bid of Rs 8,640 crore in the first round of auction, a Hinduja group entity raised the offer to Rs 8,950 crore after the deadline for bidding had expired. Subsequently, Torrent successfully moved the NCLT to prevent RCAP’s administrator from presenting Hinduja’s bid to the lenders.
However, lenders have decided to vote for a second round of auction and set a reserve price of Rs 9,500 crore. Note that all bids so far have been below RCAP’s liquidation value of around Rs 12,500 crore.
The NCLT will hear Torrent’s appeal against the second round of auction on January 12.