NCLT orders liquidation of Bharati Defence

An insolvency court in Mumbai has ordered the liquidation of Bharati Defence and Infrastructure Ltd, after rejecting the resolution plan submitted by Edelweiss Asset Reconstruction Co Ltd, leaving two dozen defence vessels stranded and a clutch of lenders standing to lose as much as ₹11,373.40 crore the debt-laden shipbuilder owes them.

More than 850 employees would lose their jobs in what was once India’s second biggest private shipyard with a much sought-after license from the government to build warships.

‘Uncertainties and speculation’

By throwing out the resolution plan, the Mumbai bench of the National Company Law Tribunal(NCLT), has “foiled the game plan of Edelweiss ARC”, said a person tracking the case.

The resolution plan was backed by the Committee of Creditors (CoC) in which Edelweiss ARC had an 82.7 per cent voting share as a financial creditor, triggering a backlash. Edelweiss ARC became a financial creditor after taking over debt of ₹6,248.84 cr from some 20 lenders by paying ₹1,813.90 cr.

NCLT cast doubts over the genuineness of the plan. “The resolution applicant has not given a practical and viable plan to manage the affairs of the corporate debtor (Bharati). The plan contains a lot of uncertainties, a lot of speculation. The public shareholding in the company would be reduced to a mere 2 per cent from the current substantial level of approximately 60 per cent,” the NCLT noted.

Of the orders for constructing 24 defence vessels for the Navy and the Coast Guard, the resolution plan has sought to build nine and cancel the balance without being liable to pay penalty for such cancellations.

“In its resolution plan, Edelweiss ARC did not offer to put any upfront money to turnaround the ailing shipyard and tried to use the Insolvency and Bankruptcy Code (IBC) as an arbitrage to hold the asset and to wait for valuations to go up before selling the company whereby Edelweiss ARC would gain unjust enrichment and lenders won’t get anything,” an industry executive said.

This view is reflected in the 14 January order of the NCLT written by Ravikumar Duraisamy and VP Singh.

The resolution plan

According to the resolution plan, only ₹400 cr is proposed to be paid to financial creditors at the end of 3 years as against ₹11,373.40 cr debt, which translates into some 3.5 per cent of the outstanding debt amount or a haircut of 96.5 per cent.

The plan implies that the resolution applicant hardly brings in any money towards the resolution plan wherein it would acquire the entire stake/controlling interest of the corporate debtor whose market value would run into thousands of crores as per the valuation done by a registered valuer.

“It is thus clear that the resolution plan should be a plan for insolvency resolution of the corporate debtor as a going concern and not for the addition of value and intended to sell the corporate debtor. In the approved resolution plan, it is specifically stated that the resolution applicant will run the operations of the company with the help of professional management team and over a period, endeavour to find a suitable investor/buyer for the same.”

“The resolution plan envisages sale of the company after adding value. There is no provision of infusing cash by the resolution applicant from its resources. Acquiring property of the corporate debtor and running the company with the sole intention of value-addition and after that selling the company and its assets, can’t be treated as Insolvency Resolution Plan of the corporate debtor. The resolution plan is not to buy and sell the corporate debtor as has been held in the case of Binani Industries Limited by the National Company Law Appellate Tribunal (NCLAT),” the NCLT said.

The proposed plan is not in the interest of all stake holders including the financial creditors and such a plan can’t be approved, the NCLT wrote and directed the liquidator to start the process of sale of Bharati Defence and Infrastructure Ltd as a whole on a going concern basis.

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