Decoding value maximization under the code’s mandate

One of the legislative objectives of the Insolvency and Bankruptcy Code, 2016, “maximization 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 that help realization of better or maximum value of assets of the corporate debtor are justifiable and in line with the mandate of the code.

The question, however, arises as to whether such maximization 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, and the in limine dismissal of the civil appeal against the same, the question is far from settled.

The preamble to the code is a composite statement referring to consolidation of laws relating to re-organization and insolvency resolution of corporates and individuals in a time-bound manner. The code creates an ecosystem for inter alia maximization of value of assets of a corporate debtor and balancing the interests of all stakeholders in a time-bound manner through a process that is predictable, certain and transparent. All this so that an expeditious decision can be taken, with respect to revival or liquidation of the corporate debtor, to put its assets to best possible economic use.

Maximization 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 payout to creditors can lead to much better asset performance and eventual maximization of value of assets of the corporate debtor.

Similarly, in some circumstances an expeditious liquidation may also result in value maximization of a corporate debtors’ assets, as its business may have lost the viability as a going concern, and immediate liquidation may give the best return on the assets of the corporate debtor.

In any case, maximization 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 features of the ecosystem that is intended to be created under the provisions of the code. The code and the regulations aim to create an ecosystem that invites all, including third parties, to participate in the resolution process, but at the same time ensures that participation is within the parameters of a pre-defined time-bound process that 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 the well recognized principle of public law emphasizing the transparency and predictability of the process. Such a process cannot possibly be allowed to be infracted in the name of value maximisation. If the process prescribed is that of closed bidding, 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 the 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 the long term achieves exactly the opposite of the objective – value maximization, apart from seriously compromising a timely conclusion of insolvency resolution, as any such process gets marred in prolonged litigation.

If processes were allowed to be altered at the last minute, serious resolution applicants who have to invest significant amounts of money, resources and time in evaluating an investment opportunity before proposing a resolution plan 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 objective of the legislation.

Shardul S Shroff is executive chairman and head of insolvency and bankruptcy practice, and Misha is a partner in that practice, at Shardul Amarchand Mangaldas

Shardul Amarchand Mangaldas & Co

Amarchand Towers, 216 Okhla Industrial Estate
Phase III, New Delhi, 110020, India
Contact details:
Tel: +91 99586 96900
Email:
shardul.shroff@AMSShardul.com
misha@AMSShardul.com
www.amsshardul.com