The fledgling Insolvency and Bankruptcy Code is on stress-test. The ongoing resolution process for a clutch of well-known defaulters such as Bhushan Steel, Bhushan Steel & Power, Essar Steel, Electrosteel and Binani Zinc has proved fascinating with prospective buyers falling over each other to grab the stricken assets on offer. The line-up of marquee players such as ArcelorMittal, Tata Steel, JSW Steel, Vedanta, Ultra Tech Cement and Dalmia Bharat to acquire these companies vindicates the quality of the defaulters’ assets on the ground and shows that all is not lost for lenders. Yet, the process has not proved smooth. If employees of Bhushan Steel are objecting to their company being handed over to Tata Steel, in the case of Essar Steel, creditors have been forced to redo the bidding process after two of the prospective buyers — ArcelorMittal and Numetal — failed the legal eligibility test.

The most interesting of them all is the case of the hotly contested Binani Cement where Ultra Tech Cement, one of the original bidders, decided to strike a deal with the promoters of Binani Cement after losing out to Dalmia Bharat in the bidding process. Ultra Tech’s private deal with Binani Industries to acquire its holding of 98.43 per cent in Binani Cement outside of the resolution process raises some crucial questions. Do the promoters of a bankrupt company under the purview of the insolvency court still “own” the company after its creditors take it over for resolution? Can a losing bidder under the resolution process strike a deal with the promoters outside of the IBC system? What do creditors do when such a deal between a losing bidder and the promoter promises higher realisations of their dues compared to the winning bidder’s quote? These are clearly tricky questions and will be answered when this case travels through the judicial system to the highest court in the land, as seems likely at this point in time.

From a standpoint of propriety it does seem out of place for a losing bidder to tie up with the defaulting promoter and worse, offer the promoter a lolly by topping the original bid. Once a company is referred to the bankruptcy court it should be irrevocable for all parties concerned as otherwise the sanctity of the resolution process can come under threat. The option for a promoter to sell off his company should end the moment the bankruptcy process kicks in. The panel that is now reviewing the IBC should dwell on this issue weighing the sanctity of the process as much as the interests of creditors who might not mind higher realisation even if it comes outside of the court process. Any new legislation has to evolve with case laws and it is good for the IBC that these issues are being thrown up very early in its life. The tussle for control of these stricken companies only shows that the bankruptcy process is meeting its objectives.

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