The Insolvency and Bankruptcy Code 2016 (IBC) has been hailed as a landmark legislation by the government for revival of the Indian credit system that has been saddled with non-performing assets and with problems in recovery of dues from defaulting corporate debtors.
While the first insolvency resolution case in Synergies-Dooray Automative Ltd (SDAL), approved recently by the National Company Law Tribunal (NCLT), shows that IBC is well equipped for fast recovery and revival, a uniform concurrence of all lenders would go a long way in making the insolvency remedial measure more effective.
On August 2, the Hyderabad bench of the NCLT pronounced its first order under IBC, approving the Insolvency Resolution Plan of Synergies-Dooray Automative. The case for revival of SDAL was earlier pending before the Board for Industrial and Financial Reconstruction. However, with the notification of IBC and the SICA Repeal Act 2003, all proceedings before BIFR were abated and thereafter, SDAL voluntarily filed an application with the NCLT under IBC for the Corporate Insolvency Resolution Process (CIRP). The total amount of claim of financial creditors was Rs 972.15 crore, including claims from creditors Alchemist Asset Reconstruction Company, Edelweiss Asset Reconstruction Company and Millennium Finance Ltd.
The committee of creditors (CoC) of SDAL approved the resolution plan of SDAL’s group company, Synergies Castings Limited (SCL), with a 90.16 per cent vote. The plan primarily provided for:
* Amalgamation of SDAL with SCL from appointed date of March 31, 2017;
* Restructuring of debts of financial creditors (reduced to 5.62 per cent of total financial debt) and operational creditors and staggered payment over a period of 3 years, without interest;
* Staggered and deferred payment of statutory dues viz. sales tax, service tax and TDS over a period of 3 years without any interest, levies and penalty;
* Exemption under Income Tax for carry-forward losses and unabsorbed depreciation;
* Funding by way of equity / loan in case of shortfall;
* Exemption from payment of stamp duty to the state government on transfer of assets on amalgamation; and
* Continued employment to all erstwhile workmen of SDAL.
The total cost of the resolution plan was Rs 54.08 crore and the same was proposed to be funded by way of induction of long-term funds and through operational accruals of SCL over 5 years. The resolution plan provided several measures including waiver of interest, staggered payments due to which, of the total debt of Rs 972.15 crore, dues amounting to only Rs 54.08 crore are sustained, which will benefit the continuation of business.
The entire IBC process is time-bound. On admission of the CIRP application by NCLT, a resolution professional is appointed for conducting the process and the proposed resolution plan is approved by a CoC. The approval has to be 75 per cent majority (where voting share is based on financial debt owed) and is further submitted to NCLT for final approval. IBC provides for 180 days timeline for completion once the application is admitted by NCLT. One may appeal to the National Company Law Appellate Tribunal (NCLAT), against the order of the NCLT.
Point of discussion before NCLT
The NCLT discussed whether the plan was in accordance with provisions of IBC. However, one of the creditors, Edelweiss Asset Reconstruction objected by questioning the validity of the CoC meeting, contending that Millennium Finance – another creditor – was wrongly included. NCLT rejected Edelweiss objections and approved the plan with certain modifications:
* The netting off of receivables and payables between SDAL and Millennium Finance (MFL) was not permitted and in order to establish the bona fide credentials of the assignment, Millennium Finance is to first pay to SCL. SCL will separately settle the debt of MFL as per the resolution plan.
* Operational creditors be paid first before making any payment to financial creditors considering the nature of creditors and quantum of dues to them.
* SCL will be bound by the undertaking given to NCLT where it has to separately take care of issues relating to stamp duty implications, staggered payments to revenue authorities as and when they arise in compliance with law and also infuse fresh funds if need arises.
The approval by NCLT within the stipulated time is a testament that IBC provides remedy for speedy resolution. This will set a precedent for lenders and corporate debtors. Edelweiss has challenged the above order of the NCLT and has appealed before the National Company Law Appellate Tribunal (NCLAT) for rejecting the resolution plan on the grounds that it was fraudulent, void. The appeal is pending before NCLAT and is sub-judice. The success in the country’s first insolvency case will depend upon the decision of NCLAT in the above matter. It would be interesting to see how stamp duty, income tax and other revenue authorities consider SCL for exemption or staggered payment arrangement for overall approval of the plan. There are precedents, where through court-approved restructuring schemes, applicants seek to obtain various reliefs under the Income Tax Act and similar legislations. Courts have held that revenue authorities are free to give impact to transactions in accordance with relevant laws. In the SDAL case as well, out-of-the box concessions under the Income Tax Act has been requested. The NCLT decision did not give any direct observation on the tax proposals submitted in the resolution plan.