Insights
De-coding value maximisation under the code
July 15, 2019One of the legislative “object” of Insolvency and Bankruptcy Code, 2016 (the “Code”) “maximisation of value of the corporate debtor” has often been cited to justify judicial interpretation and conclusions in relation to several ongoing insolvency resolution proceedings under the Code. The overall conclusion has been that measures in an insolvency resolution which help realisation of better or maximum value of the assets of the corporate debtor are justifiable and rather in line with the mandate of the Code.
The question however arises as to whether such “maximisation of value of assets of the Corporate Debtor” are justified even at the cost of infraction of due process of law. Despite the judgment of the National Company Law Appellate Tribunal (“NCLAT”) in the insolvency proceedings of Binani Cements Limited and the in limine dismissal of the civil appeal against the same, the question should be treated as far from settled.
The Preamble to the Code is a composite statement referring to consolidation of laws relating to re-organisation and insolvency resolution of corporates and individuals in a time bound manner. The Code creates an ecosystem for inter alia maximisation of value of assets of a corporate debtor and balancing of interests of all stakeholders in a time bound manner through a process that is predictable, certain and transparent.
This object needs to be interpreted in context of introduction of the Code as a consolidating statute to substitute an inefficient regime scattered over several statutes. The Bankruptcy Law Reforms Committee, in its November, 2015 Report (the “”BLRC Report”) sets out the context of enactment of the legislation. Under the erstwhile regime, the assets of the corporate debtor remained un-utilised and/or un-realised due to multiplicity of laws and forums governing the field leading to inordinately delayed litigation and the hurdles put forth by promoter seeking to continue to control of the corporate debtor resulting in loss in value. It is in this context that the Preamble of the Code refers to maximisation of value of assets of the corporate debtor in a time bound manner and balance the interests of all stakeholders, so that an expeditious decision with respect to revival or liquidation of the corporate debtor to put its assets to its best possible economic use, can be taken.
Maximisation of value of assets of corporate debtor, does not mean and refer to maximum recovery of dues to the creditors. On many occasions, short-term reduction of pay out to creditors can lead to much better asset performance and eventual maximisation of value of assets of the corporate debtor. Similarly, in some circumstances, ironical as it may sound, an expeditious liquidation may also result in value maximisation of a corporate debtors’ assets as its business may have lost the viability as a going concern and expeditious and immediate liquidation may give the best return on the assets of the corporate debtor.
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In any case, maximisation of value of assets of a corporate debtor cannot be achieved at the cost of legality of the process followed in discovering such maximum value. Certainty, predictability, timeliness and transparency of the process are essential feature of the ecosystem which is intended to be created under the provisions of the Code. The Code and the regulations aim to create an ecosystem which invites all (including third parties) to participate in the resolution process, however, at the same time ensures that the said participation is within the parameters of a pre-defined time-bound process which is certain, transparent and predictable.
Section 25(2)(h) of the Code requiring the committee of creditors and the resolution professional to lay down the process of invitation and evaluation of resolution plans before inviting resolution plans, is in recognition of well-recognised principle of public law emphasising the transparency and predictability of the process. Such pre-defined process cannot possibly be allowed to be infracted on the name of value maximisation. If the process prescribed is that of closed bidding process, it cannot suddenly be altered into an open auction after declaration of inter-se competitiveness of the resolution plans received in the closed bidding process.
The certainty and sanctity of a process is necessary to maintain the sanctity of the legislation, which cannot be compromised by last minute changes in the process by allowing toppling bids. This would discourage resolution applicants from coming forward with their best offers in first instance and incentivise, under-bidding, with a chance to re-bid if required to outbid the rest. This not only encourages unscrupulous practices but also increases the chance of under-bidding and in long term, achieve exactly opposite of the object sought to be achieved – value maximisation, apart from seriously compromising timely conclusion of insolvency resolution as any such process gets marred in pro-longed litigation.
If processes were allowed to be altered at the last minute, serious resolution applicants who have to invest significant amount of money, resources and time in evaluating an investment opportunity before proposing a resolution plan, including tying up of funds to support the proposed investment by paying commitment fees, will be discouraged from participating in the process altogether leading to failure of the Code as an effective platform for resolution of distressed assets and defeating the entire object of the legislation.
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Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
Misha
Partner
