NCLT and IBC

Series: #TonightsFinNews

Post No.: 2

Topic: IBC and some major resolution cases

This is a fairly vast topic because of which I have divided this topic in two posts. In this post we will introduce the concept and look at some major cases and in the next post we will analyze and see if IBC delivered what it promised. So stay tuned for the next post as well. Do follow #TonightsFinNews to see the post in your timeline. Let’s get started.

Establishing the concept:

To understand this article completely it is pertinent to understand, What is IBC and NCLT? What do they essentially do? So those who are new to these terms, the first para is dedicated to you other who are well aware can skip this through.

Insolvency and bankruptcy (IBC) code was enacted to be a comprehensive legislation for insolvency resolution process with object of helping banks to recover NPAs in a speedy fashion. It was implemented through an act of parliament and received Presidents assent in May 2016. The adjudicating authority for the purpose of insolvency resolution and liquidation for corporate persons is National Company Law Tribunal (NCLT). I know lot of jargon so let’s take example of Jet Airways to understand this entire concept. Jet Airways grounded its operations on 17 April 2019 due to lack of funds to meet its operational costs since then operational creditors and a consortium of lenders led by SBI have taken Jet airways to NCLT to find a way to revive the company. Creditors first filed a plea to NCLT and then NCLT accepted it looking at the merits of the case. After this Resolution Professional, in this case Ashish Chhawchharia of Grant Thornton was suggested by the lender and appointed by the court. Next the powers of BOD of the company were suspended and taken by the Resolution Professional who facilitated CoC in arriving at the best resolution plan by inviting one from promoters, lenders and interested bidders, one of them was approved by Committee of creditors (CoC) and then finally by NCLT, however if revival would have not been possible the company would have been liquidated. This entire process is governed by IBC and adjudicating authority is NCLT. So basically if a company defaults in paying its dues (Minimum 1cr) then creditors can file a plea to NCLT to start the resolution process. This is obviously an oversimplified explanation but it gives you a fair bit of idea about what IBC and NCLT.

Major Cases under NCLT

VIDEOCON

Business of company: The Company operates in four segments: Consumer Electronics and Home Appliances, Crude Oil and Natural Gas, Telecommunications and Power

Claims: Total claims submitted: 72353 Cr | Total Claims admitted: 64937 Cr. Out of this, ₹57,400 crore was owed to over three dozen banks and other financial creditors.

Lead Creditors: SBI - 11175 Cr | IDBI - 9562 Cr | Central Bank- 5064 Cr | BOB – 3524 | ICICI – 3318 Cr. Between 6 June and 25 September, 2018, the Mumbai bench of the NCLT initiated corporate insolvency proceedings against several companies of the group after SBI referred them to the dedicated bankruptcy court.

Resolution Professional: Mr. Abhijit Guhathakurta

Resolution Plan: NCLT on 8 June 2021 approved billionaire Anil Agarwal's Twin Star Technologies to take over Videocon Industries Ltd for about Rs 3,000 Cr. Twin Star, a part of Vedanta Group, will pay around up front cash payment of Rs 200 Cr to financial creditors and non-convertible debentures of Rs 2,700 Cr to financial creditors, carrying a coupon of 6.65% per annum. Workmen and employees will also get approximately Rs 52 Cr as upfront cash payment. The consolidated resolution amount for 13 companies offered by Twin Star stands at ₹2,962 Cr against the admitted claims of ₹64,838 Cr.

Recovery of Creditors via Resolution Plan: Twin Star is offering 2962 Cr to the lenders, which makes only 4.15% of the total outstanding claim. It is interesting to note that Registered valuers valued the assets of the 13 companies at a fair value of ₹4,069 Cr and at a liquidation value of ₹2,568 Cr which means that the offer by Twin Star is a little above its Liquidation value. NCLT has ordered IBBI to examine whether confidentiality clause was followed properly or not in this resolution process. A total haircut of 95.85% to all the creditors.

NCLT also added, “The successful resolution applicant (Twin Star) is paying almost nothing and 99.28% haircut is provided for operational creditors. During the course of the hearing, it is also submitted that a voluminous number of operational creditors are also MSMEs and if they are paid only 0.72% of their admitted claim, in the near future many of these operational creditors may have to face insolvency proceedings, which may be inevitable".

Jet Airways (India) Ltd

Business of company: The Company is in the Business of scheduled air transportation which includes carriage of passengers & cargo and provision of related allied services.

Claims: Total claims submitted: 40259 Cr | Total Claims admitted: 15525 Cr

Lead Creditors: SBI - 1636 Cr | Yes Bank - 1,084 Cr | Punjab National Bank (PNB) - 754 Cr | IDBI Bank - 594 Cr. A consortium of 26 bankers led by SBI approached the tribunal (NCLT) to recover their dues. NCLT on 20 June 2019 admitted the insolvency petition.

Resolution Professional: Ashish Chhawchharia of Grant Thornton India.

Resolution Plan: NCLT on 22 June 21 approved the resolution plan by Jalan Kalrock Consortium (Dubai-based businessman Murari Lal Jalan and Kalrock Capital Management Ltd. in London). The consortium has proposed to invest ₹600 Cr in the first two years in the grounded airline to repay creditors and acquire an 89.79% stake in the carrier. The consortium has also proposed to invest ₹475 Cr in the first two years and ₹125 Cr by selling existing non-core assets like realty and luxury cars by the end of the first year. It has also proposed to pay ₹131 Cr, ₹193 Cr, and ₹259 Cr at the end of the third, fourth and fifth year, respectively, to financial creditors from the airline’s cash flows. Overall, the consortium hopes to repay ₹1,183 Cr to creditors over five years, which would include collections from asset sale proceeds and cash flows.

Recovery of Creditors via Resolution Plan: Lenders of Jet Airways will only receive 5% of what they owed, new owners of Jet Airways have proposed paying ₹380 Cr ($51 million) of the ₹7,810 Cr they owe to financial creditors. Some ₹190 Cr rupees will be paid upfront within six months while the rest will come from the proceeds of issuing zero-coupon bonds. The new owners have also offered the lenders a 9.5% stake in Jet Airways and a 7.5% interest in Jet Privilege, the carrier’s loyalty and rewards Management Company.

There are many interesting cases that can be discussed. Do comment if you want me to cover more. If you want to understand or discuss any of the points comment down. Also stay tuned to read performance review of IBC in the next post. Follow #TonightsFinNews, Like and share fam.