SC Order on Binani Cement Acquisition - Assessing the IBC Process
iasparliament
November 23, 2018
Why in news?
The Supreme Court (SC) recently allowed UltraTech Cement’s purchase of bankrupt Binani Cement to go through.
What is the case on?
The case involves the bidding process of debt-laden Binani Cement Ltd, under Insolvency and Bankruptcy Code (IBC).
In the course of bidding, Dalmia Bharat Pvt. Ltd-owned Rajputana Properties had bid Rs 69.30 billion.
However, the Binani's Committee of Creditors (CoC) then received a revised bid from UltraTech cement of Rs 79 billion.
Binani Cement’s CoC decided to consider this improved bid, even after Rajputana Properties’ offer was declared the highest.
It was also filed with the Kolkata bench of the bankruptcy court for its approval.
The CoC's decision would entirely pay off all secured and unsecured financial creditors, as well as operational creditors of Binani.
Rajputana Properties had approached the apex court, challenging the CoC’s decision.
It argued that it was against the spirit of the insolvency law as one could not have revised its bid after being aware of the competitor’s bid.
The court referred the matter to the NCLAT (National Company Law Appellate Tribunal).
What was NCLAT's ruling?
A two-member bench of NCLAT had dismissed the appeal by Rajputana Properties.
NCLAT held that the objective of the Insolvency and Bankruptcy Code was resolution.
Ultimately, the purpose of the resolution is for maximization of the value of assets of the debtor.
Also, the resolution process should consider the interests of even those creditors, who are not part of the resolution process, such as operational creditors.
NCLAT said that Rajputna's offer for Binani Cement was “discriminatory” against some financial creditors.
Notably, UltraTech’s bid was backed by 100% of secured creditors, 100% of unsecured creditors and 100% of operational creditors.
Backed by this rationality, the Court upheld the order of the National Company Law Appellate Tribunal (NCLAT).
This is a victory for UltraTech and for the committee of creditors of Binani Cement.
What are the concerns?
The ruling is a severe blow to the integrity of the process embedded in the Insolvency and Bankruptcy Code (IBC).
The decision seems to be not in keeping with the natural justice of the auction process.
Acceptance of offers outside the IBC-sanctioned bidding process undermines the whole basis of the auction mechanism.
Moreover, operational creditors are not specifically “discriminated” against in the IBC process.
There is, in all economic transactions, a hierarchy of creditors.
Financial creditors such as bond-holders are usually at the top of this list, and the IBC recognises this basic fact.
In sealed-bid auctions, allowing collection of information, after opening the bid, to make another offer is unfair.
If this is allowed, all future auctions will see lower bids as other parties begin to hold back their offers to examine what others would bid.
In any case, there is now an incentive for companies to short-circuit or manipulate the bidding process.
What lies ahead?
Certainly, the gap needs to be addressed by the government.
The NCLAT judgment needs to be carefully studied by the appropriate ministries (including corporate affairs, finance, law).
Suitable amendments have to be proposed to the IBC’s governing legislation.
The legal loopholes that have been taken advantage of in this case have to be addressed.
