Corporate Delinquency. When former biz owners try the back door

On October 17, at around 5 pm, R Subramaniakumar, the administrator of Dewan Housing Finance, received an unusual letter from an inmate of Taloja jail near Mumbai. The nine-page letter was from the finance company’s erstwhile promoter Kapil Wadhawan, detailing an offer to settle all dues in exchange for taking back control of the firm.

Wadhawan, who was in prison over allegations of fraud, had timed his letter to coincide with the last day for submission of bids for the debt-laden housing finance company under the insolvency process. He offered his personal and family properties, which he claimed were worth ₹43,000 crore, for repayment of outstanding loans. On the same day, Subramaniakumar also received bids from several entities including Adani group, Piramal Enterprises and US-based investment firm Oaktree Capital to acquire the company.

Just a few days after Wadhawan made his offer to buy back Dewan Housing, Videocon Group promoter Venugopal Dhoot sent a similar proposal to settle his group’s dues at ₹31,000 crore. In 2018, when Videocon was dragged to the National Company Law Tribunal by the State Bank of India for defaulted loans, it was estimated the group and its entities owed the bank a whopping ₹46,000 crore. Dhoot made his offer even as lenders were in talks with two other entities, of which one was owned by Vedanta group promoter Anil Agarwal.

Ex-promoters like Wadhawan and Dhoot are taking recourse to section 12A of the Insolvency and Bankruptcy Code (IBC) to regain control of their companies. This section allows banks to withdraw a company from the insolvency proceedings if an offer to settle dues is made. However, section 29A of the Code prohibits defaulting promoters from submitting a debt resolution plan.

Kapil Wadhawan

Contrary sections

Nadiya Sarguroh, Senior Associate, MZM Legal, says a perusal of section 12A and section 29A does indicate that the two contradict each other. However, she says, when read with the object of the Code, the two are separate actions independent of each other.

According to her, section 12A can be relied on before getting the resolution plans of other applicants. Whereas section 29A prohibits defaulting promoters from submitting resolution plans after bids are placed.

Raj Bhalla, a partner at law firm MV Kini, said section 12A is not a resolution plan but just a settlement between the corporate debtor and creditors.

While banks have rejected the offers of Dhoot and Wadhawan, the issue gets complicated when there are no credible bids through the insolvency process. The options left for creditors are to liquidate the company or settle with the promoter. For instance, a consortium of lenders led by IDBI Bank has allowed C Sivasankaran to take back his company by paying a bit more than the liquidation amount.

C Sivasankaran

Bad precedent

Bharat Chugh, independent counsel and former Judge, said such settlements may create perverse incentives for defaulters, who can get away with a mere rap on the knuckles after defaulting on loans worth millions of dollars of public money. This would lead to neither responsible banking and lending, nor responsible repayment, and creates bad precedent.

But the IDBI-Sivasankaran type deals are encouraging other defaulting promoters to queue up. Manoj Gaur, Executive Chairman of Jaiprakash Associates Ltd, has written to the insolvency resolution professional at Jaypee Infratech Ltd with a plan to pay dues in full. Gaur has offered ₹9,783 crore as upfront payment, land swap, and long-term debentures valued at about ₹12,500 crore. This comes even as Jaypee Infratech is undergoing a debt resolution process under the IBC rules, and the Committee of Creditors (CoC) has already identified two potential bidders.

Dinkar Venkatasubramanian, Partner and National Leader, Restructuring and Turnaround Services, EY, says, “In companies where the CIRP [Corporate Insolvency Resolution Process] has progressed, bids have been submitted and resolution plans approved by the CoC, I don’t think it can be reversed. There are routes opened under section 12A, but the intent is not that the promoter can come in to disrupt a process. Value maximisation is important, but it has to be within the boundaries of the process and the sanctity of the law needs to be respected.”

BK Divakara, Chief Financial Officer, CSB Bank, says that the attempts by former promoters of stressed companies to gain back-door entry are unethical. A question on the minds of bankers is if an ex-promoter has money then why did the company default in the first place.

‘Show us the money’

Divakara emphasises that the intention of banks is not change of ownership but recovering the maximum amount. He notes that one school of thought is that if a former promoter is willing to pay more than the highest bidder then why not explore that option. But their capability to raise money and sources of funding need to be closely examined.

According to Ramnath Pradeep, former chairman and managing director of erstwhile Corporation Bank, the ultimate aim of banks is to recover the public money lent to companies that later became non-performing accounts. “If a promoter is ready to pay, why should banks not accept? Their first priority is to recover the money. However, bankers should insist on seeing the colour of the promoters’ money,” he says.

Misha, Partner, Shardul Amarchand Mangaldas, says that value maximisation is just one of the objectives of IBC. There has to be fairness and predictability of outcomes and process, else no third party would want to participate in the CIR process.

Banking expert V Viswanathan feels that once the final bid has been recommended by the resolution professional and approved by the CoC, fresh bids, including offers from promoters, should not be entertained. Some of these offers also raise the suspicion that they are trying to scuttle takeover efforts by the successful bidder.

“If this is allowed, IBC, which envisages faster resolution for fetching better realisation than through liquidation, will be derailed successfully by all promoters,” Viswanathan says.

Meanwhile, at Taloja jail, Wadhawan is gearing up for a protracted legal battle after filing a plea in the Supreme Court, seeking a direction to the lenders of DHFL to consider his offer. The apex court’s decision in this case will determine the fate of many former promoters wanting to take back control of their companies.

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