Explained: The controversy around Binani Cement?s insolvency

By  Zarnaab Aswad

Binani Cement’s insolvency may be attributed as one of the most intriguing insolvency cases that are posed to test the new bankruptcy framework as courts will have to decide as to whether a counter-offer can be accepted if the Committee of Creditors (“CoC”) has already declared a winning bidder.

Insolvency resolution process generally

Once the insolvency process of a company (alternatively, “Corporate Debtor”)  is initiated as per the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”), its board is suspended, promoter equity loses influence, incumbent management is taken over by the insolvency professional and major decisions are taken by the CoC. Further, resolution plans are invited from bidders outside the company (among others, promoter group of the company and persons acting in concert are disqualified from bidding). Bids are assessed by the CoC on the basis of a stipulated evaluation matrix and the winning resolution plan is submitted to the NCLT which happens to be the final approver of any resolution plan.  All of this is to be completed within a stipulated time frame of 270 days, failing which, the company may be liquidated.

The insolvency story of Binani Cement so far

Binani Cement (“the company”) is a cement manufacturing subsidiary of Binani Industries which holds 98.43 per cent stake in the same. All of Binani Industries’ equity shares in the company are pledged to lenders as security for the loans to Lenders. As per Binani’sestimates, it has a total of between Rs. 5,600-6,000 crore as debt from lenders and other liabilities. The company ran into troubles as its aggressive expansion plans failed whilst the Indian Infrastructure industry saw a slowdown in growth.

In July 2017, Kolkata NCLT admitted a petition against the debt-laden company, when it failed to repay debts worth Rs. 97 crore to Bank of Baroda. The insolvency resolution process kicked in when the CoC appointed an insolvency resolution professional and he, in turn, released a process document stating that the CoC now had the sole discretion to approving a winning resolution applicant’s bid. Accordingly, six resolution applicants (bidders) including Dalmia Bharat-Bain Piramal Resurgence Fund Consortium and UltraTech Cement submitted their plans and the CoC voted in favour of the resolution plan submitted by Dalmia Bharat proposing to buy Binani Cement for Rs. 6,700 crore (the “highest bid”). The successful bid was tabled before NCLT, Kolkata.

An unsuccessful bidder, UltraTech had later increased its offer for Binani Cement after Dalmia Bharat emerged as the highest bidder. The CoC, however, approved the rival bid by Dalmia Bharat. UltraTech then approached the NCLT filing petitions seeking quashing of the resolution process questioning the evaluation criteria used to pick the winning bid and circumvention of its objections by the resolution professional and CoC. AtulDaga, ED &CFO of UltraTech Cement, had alleged that the resolution process at Binani Cement “was shrouded in secrecy”, with bidders not being allowed to participate in the meetings. The company added that it would not shy away from even moving the Supreme Court if its petitions were not heard.

Binani Industries also petitioned against that due process was not followed, claiming opacity in the conduct of CoC and insolvency resolution professional and requested termination of the insolvency.

In another twist, the resolution professional alleged that the “fraudulent transactions” were made by the Binani group on the basis of a forensic audit report. The resolution professional also filed petitions alleging non-cooperation by the incumbent Binani management and other process issues.

The parallel deal between Binani Industries and UltraTech

Bypassing the bidding process, UltraTech, informed the stock exchanges last Monday, that it was willing to pay Rs. 7,266 crore to acquire Binani Industries’ 98.43% stake in its cement unit “subject to termination” of insolvency proceedings. UltraTech’s board also agreed to issue a letter of comfort to Binani Industries, committing Rs7,266crore funding, as the BrajBinani-led firm seeks to stop insolvency proceedings of the cement unit.

On being asked if the agreement with UltraTech violates the insolvency and bankruptcy framework, Sameer A. Kaji, senior adviser for corporate strategy at Binani Industries, said to the press, “It is an evolving process. It should ideally be within the right of the debtor to clear its dues. Creditors should not have any issue with it. The UltraTech deal leaves around Rs600 crore for the equity shareholders besides the clearing of all outstanding dues.” He further added, “The idea of IBC is to maximize value for all stakeholders. The NCLT has powers to keep the corporate debtor out of the IBC process if all liabilities are paid. UltraTech has given us a letter of comfort of Rs.7,266crore to buy Binani Cement, based upon which we are seeking termination of insolvency proceedings at NCLT.” Asked if the proposal could go through with the matter pending with the NCLT, AtulDaga, said, “If you have a house that’s mortgaged with a bank, you are still the owner and can sell it and repay the loan.”

According to legal experts, withdrawal of insolvency proceedings at the end of the resolution process could prove to be a difficult proposition as there is no clear procedure under law.Even the agreement between UltraTech and Binani Industries is of no consequence if the resolution plan filed with NCLT is found to be legally valid, adding that under the Code, shareholders have no say in implementing a resolution plan approved by creditors. Some also point out to the possibility that with this parallel deal, UltraTech could also be seen as a person acting in concert with the insolvent promoter group, and thus ineligible to bid as the code now makes it clear that the promoter group cannot participate directly or indirectly in the bidding process.

Another issue to be addressed is that Binani Industries claims that the total debt amounts to less than Rs. 6000 crores and lenders say that the debts amount to Rs. 8,000 Crores. UltraTech has bid 7,283 crores while the debtors claim that now the debt amounts to about 8,000 crores.

Unanswered questions

The Code is being tested on something like this for the first time and no one knows a definitive correct answer. All the parties are ready to take the matter, if need be, to the Supreme Court which will finally decide whether Binani Industries has the locus standi to come up with an alternative deal and whether such a deal can be accepted, subverting an entire insolvency resolution process and corresponding provisions of the code. Or that balancing the benefit of all stakeholders is the need to be addressed. What’s known is that if the matter ends up in the Supreme Court, a delay would be inevitable as time was envisaged to be the essence of insolvency resolution process under the Code.

Hearing of the matter before NCLT

NCLT Kolkata suggested today (27^th March) for an out-of-court settlement between Binani Industries and CoC. The judicial member of the Tribunal has asked the resolution professional if CoC can consider giving the promoters two weeks to pay all debts while Dalmia agitated to the same. The next hearing is scheduled on 2^nd Apr.,the Tribunal has observed that it is open to CoC to consider Binani’s proposal as an adjudication of the matter remains pending.