NCLAT allows another round of bidding for bankrupt firm Reliance Capital

The National Company Law Appellate Trib­u­nal (NCLAT) on Thur­sday allowed another round of bidding for bankrupt financial services firm — Reliance Capital (RCap). The order will help Indian lenders seek better offers from the two bidders — Hinduja group and Ahm­edabad-based Torrent group.

The Torrent group is likely to challenge the order in Supreme Court (SC), informed a legal source. The NCLAT said the SC has made it clear that the commercial wisdom of the committee of creditors (CoC) is paramount and hence it is setting aside the National Company Law Tribunal (NCLT) order.

Torrent had moved NCLT to stop the second round of auction after its offer of Rs 8,640 crore appeared as the highest bid. The Hindujas ma­de an offer of Rs 9,000 crore after the auction closed.

After NCLT ruled in Torrent’s favour, the lenders moved NCLAT. Torrent argued in NCLAT that the objective of the Insolvency and Bankruptcy Code (IBC) was to prevent prolonged negotiations conducted by CoC un­der the garb of value maximisation and curtail unne­cessary delays on account of unsolicited bids and litigation that ensued.

The mischief caused by unsolicited late bids and consequent delay-induced value destruction has been well recognised in the legislative material and hence, its offer should be allowed, Torrent had said.

Lenders of RCap have submitted before the NCLAT that the CoC is being prevented to discover the best price in the corporate insolvency resolution process and the NCLT has acted more than its jurisdiction at a stage where even signed plans were not placed before the CoC for consideration.

In its written submission before NCLAT, Vistra ITCL (India) — RCap’s secured lender — said, “The NCLT has us­urped the jurisdiction of the CoC by holding that the CoC has to vote on the Rs 8,640-crore plan of Torrent and the Rs 8,110-crore plan of IndusInd Inte­rnational Holdings (IIHL), a part of Hinduja Group, and that CoC has no jurisdiction to negotiate even on the figures.”

It further argued that NCLT has not even looked at these plans and there is no Rs 8,110 crore plan of IIHL, and NCLT has substituted its opinion for that of CoC’s, which is not permissible under IBC.

Denial of the extended challenge mechanism and sale of RCap assets to Torrent at a value discovered in the first challenge mechanism would result in a loss of Rs 5,000 crore up­front monies to banks, it said. In their written submission filed with NCLAT, the lenders have stated that Torrent is a private entity, while RCap has admitted claims of over Rs 25,000 crore, most of which is public money.

This includes Rs 13,500 crore of claims belonging to Life Insurance Corporation of India, Employees’ Provident Fund Organisation, other provident and pension funds, Army Group Insurance Fund, and Torrent has sought unjust enri­chment at public expense. The lenders also argued that continued stay on the exte­n­ded challenge mechanism will ca­use irreparable harm to len­d­ers. It has already resulted in an interest loss of over Rs 275 crore in the past six weeks, with a further loss of Rs 45 crore per week.

CoC, in the exercise of its commercial wisdom, which is one of the core principles of IBC identified by SC, has voted unanimously for an extended challenge mechanism, as the outcome of the first challenge mechanism was sub-optimal and unsatisfactory.

The stay-on extended challenge mechanism has foreclosed the CoC from discovering higher value and put the resolution process in suspended animation.

The lenders had argued that according to the terms of the auction, the CoC has complete freedom to choose any method or process of negotiations, and one such method can include a challenge mechanism and said there was no limitation on the number of methods of challenge mechanisms adopted. The auction rules sufficiently support the power of lenders to hold multiple challenge mechanisms, it had said.

The lenders said even if there was a successful resolution applicant, the CoC is free to negotiate with other applicants, before voting.

In their submissions, lenders said Torrent misused the ex-parte order of the NCLT on January 3 to rewrite its resolution plan.

On January 6, the company revised the upfront payment from Rs 3,750 crore to Rs 8,640 crore, while deliberately not making the CoC a party in the NCLT.

The revised resolution plan of Torrent dated January 6, with an upfront payment of Rs 8,640 crore, was a ‘toppling bid’, designed to score higher than the Hindujas in an evaluation Matrix scoring, it said.

RCap was sent for debt resolution under IBC in November 2021.

It’s challenging

November 2021: RCap sent for debt resolution under IBC to NCLT

December 2022:

• Torrent makes the best offer Rs 8,640 cr in auction
• After auction, Hinduja group revises its bid to ~9,000 crore
• Lenders push for a second auction

January 2023: Torrent moves NCLT against second auction

February 2023:

• NCLT rules in Torrent’s favour and suspends another auction
• Lenders move NCLAT