When a majestic building stood up erect in a conspicuous part of the town at the dawn of the current millennium, it did herald a new landmark of Chennai. Hotel Royal Le Meridien became the chosen destination for conferences and banquets with its large campus for quite some time.
Its present pitiable state can be seen both visually and gleaned from a decision of the Supreme Court dated 3 May 2023 with the rather inscrutable cause title of MK Rajagopalan (appellant) vs Dr Periasamy Palani Gounder (respondent).
The cause title also testifies to the fact that the battle is between two possibly powerful agencies to the exclusion of the actual victims when a company goes down - its creditors.
Appu Hotels Ltd, which owns the property referred to above, is the corporate debtor (CD) whose corporate insolvency resolution process (CIRP) is the subject matter of the above case. The appellant referred to is the resolution applicant (RA), who submitted the resolution plan during the CIRP, which was approved by the committee of creditors (CoC).
The respondent is the promoter and the main shareholder of the CD.
This case exemplifies the maladies of the process that insolvency resolution has become captive to.
The Insolvency and Bankruptcy Code (IBC), when introduced in 2016, was hailed as a signature reform of the incumbent government and raised the hopes that the law, largely modelled on the framework available in the more economically developed jurisdictions, would be a great improvement over the Sick Industrial Companies Act (SICA) which was administered by the board for industrial and financial reconstruction (BIFR).
The major lacuna in the earlier law was that the process brought all the stakeholders before the BIFR, which had to find a package that could have the buy-in of all the parties. This was numerically a challenge in most cases. The system, neither by law nor by practice, allowed any of the constituents to weigh in more than another.
The process of building a consensus and striking a compromise cost a lot of time and most attempts were frustrated and the assets requiring resolution lost value in the process. The incumbent management and the promoter, who would have primarily contributed to the company’s losses, counted disproportionately in the process and managed to scuttle it effectively.
IBC, by design, gave primacy to the financial creditors (FC) who typically have more skin in the game and such FC, in practice, are the public sector banks being the biggest lenders to businesses that turn sick.
While not having the most efficient format that kept laws and procedures out but gave primacy to speed and equity, IBC could have been made more timebound if the typical vested interests that stall resolutions and protract issues not to be dislodged from their incumbent positions, had been kept out.
The biggest flaw of letting the promoters have a say, despite their (in)actions running the business down, found in the BIFR proceedings has, through the back door, crept into the IBC process.
Practically every CIRP has the promoter, by hook or by crook, sneak into the process and manage to, with the help of high-cost legal firepower, ensure status quo.
It is rather murky that the CoC somehow contributes to the mess by either covertly helping the cause with some procedural infractions in the CoC process or maybe even overtly tilting the scales in favour of the promoter by allowing a last-minute plan of settlement by the promoter (sec12A withdrawal) in defiance of the spirit of the law and speedy resolution.
The institutional framework has clearly not helped the cause of quick resolution with multiple levels of scrutiny at the NCLT, NCLAT and implausibly the Supreme Court. The process of appeal and review has clearly worked against the commercial wisdom prevailing in a resolution.
When the concept of DRS and a third TV umpire was brought into the game of cricket, orthodox fans felt it was a sacrilege to allow an umpire to be overruled even if the best technology was used.
IBC allows the third umpire as a routine and has a provision to question the TV umpire first before the match referee and next, the ICC! The game planned as 20 overs per side is lucky if it ends in five days or at least in ten!
The Appu Hotels case casts light on the faults in the system and how the promoter, being given a footing, can more than put a spanner in the works. The very fact that the promoter appears as a party in the cause list shows the degeneration in the process.
None of the FC who are part of the CoC are the cause of the fight though they have the maximum to lose with the protraction of the process.
Does the matter stand settled post all this fuss? No! The supreme court has given the matter a fresh lease of life so that another innings can start. Did the court break any new ground in corporate law or propound a jurisprudence that will help future cases get a speedy resolution? The answer is no!
This was a case where the CoC, by a significant majority, approved the resolution plan of the appellant and rejected the artifice of the promoter to thwart the plan by a last-minute effort. The NCLT approved the matter. Not to be deterred, the promoter challenged the case on many procedural matters before the NCLAT, which the NCLT had clearly ruled against. A principal issue was the eligibility of the RA to submit the proposal.
The status of the RA was questioned for the most specious reasons, though it strangely prevailed with the Supreme Court, ultimately. The idea is not to burden the readers with too many technicalities, but the essence of the point highlighted is that the promoter managed to scuttle the process most elegantly though many of the issues canvassed before the Supreme Court were ruled against, showing the intermediate authority (NCLAT) in very poor light.
The PSBs, led by the formidable SBI together with the Tourism Finance Corporation, constitute close to 70% of the voting in the CoC. The strangest part of the story is that the CoC, that summarily rejected the settlement plan given by the promoter while the first resolution application was approved, in a subsequent revisit gave it 100% thumbs up! What influence was brought to bear on the process can only be speculated.
Since the judgment does not give a clear comparison of the alternative proposals considered, it is difficult to comment on the relative merits. But the limited information available indicates to the fact that the Appellant (RA) had presented the more acceptable of the proposals.
There is a reasonable basis to infer that the promoter used the information of what is given by another applicant to come out with his proposal. This is clearly contrary to the process dictated under IBC. This also shows possible collusion and leakage of information.
While this resolution has already seen multiple rounds with 19 CoC meetings held so far, which may expand significantly with a fresh round to commence, the honours currently rest with Reliance Capital’s CIRP, which has witnessed 42 CoC meetings till date.
The insolvency board should consider instituting the equivalent of an orange cap in the IBC process!
Unless the law is urgently amended to eliminate the promoter and any of the shareholders from the scene, once the CoC is convened and the EoI is invited from others, the law will need to be renamed as IBT - indefinitely buying time!
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
