Protecting IBC’s spirit: NCLT focus on confidentiality clause in Videocon Industries resolution welcome

It has requested the Insolvency and Bankruptcy Board of India (IBBI) to examine the issue in depth and to ensure the confidentiality clause was not compromised, in letter or in spirit.

The Mumbai bench of the NCLT has done well to red-flag the results of the resolution of Videocon Industries Limited (VIL) and highlight how surprisingly close the winning bid—of Anil-Agarwal-led Twin Star Technologies—was to the liquidation value. By observing, in its order, that “surprisingly, the resolution applicant also valued all the assets and liabilities of all the 13 companies and arrived at almost the same value as the registered valuers,” the tribunal has done the insolvency process a service.

It has requested the Insolvency and Bankruptcy Board of India (IBBI) to examine the issue in depth and to ensure the confidentiality clause was not compromised, in letter or in spirit. “Even if the confidentiality clause is in existence, in view of the facts and circumstances … a doubt arises upon the confidentiality clause being in real-time use,” the bench comprising H P Chaturvedi and Ravikumar Duraisamy wrote. Twin Star was paying Rs 2,962 crore for VIL against the admitted claims of Rs 64,838 crore; in other words, the creditors agreed to a haircut of an astounding 96%. The assets were valued at a fair value of Rs 4,069 crore and at a liquidation value of Rs 2,568 crore. In other words, Twin Star was able to get the company at a little more than the liquidation value and well below the fair value. To be sure, the final decision on the extent of the haircut to be taken, when stressed assets are being sold in the insolvency courts, rests with the lenders. Nonetheless, the NCLT’s observations are seminal and, hopefully, the IBBI will look into them. It may be of academic interest, but given the Insolvency and Bankruptcy Code is still a relatively new piece of legislation, it is important all stakeholders highlight any concerns they may have. The government has been proactive in amending the law and inserting new sections to ensure the corporate insolvency resolution process (CIRP) is a fair one. The VIL-Twin Star case draws attention to the fact that creditors, at times, are realising pitifully small amounts—in the Alok Industries case, where a whopping Rs 29,523 crore was at stake, the recovery was a paltry 17%.

Perhaps there is a better way to arrive at the final price that the winner pays. Most importantly, critical information cannot leak. Indeed, without casting aspersions on any of the participants in the process, it is truly surprising that the lenders did not strive to get a better price for the asset. Of the 4,376 cases admitted to the CIRP till the end of March 2021, about 30% have ended up in liquidation. That is not a small ratio but perhaps the assets were not of good quality. Nonetheless, lenders owe it to taxpayers to try and recover as much as possible. Till March 2020, the value realised by financial creditors, as a share of their claims admitted was only 46%; this is uninspiring. It is also important that operational creditors are able to get back their dues; else, we are in for a fresh round of insolvencies.