Jun 30, 2017

How resolution professionals prepare to face a new fight of creditors

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Resolution professionals, a key constituent of bankruptcy proceedings under India’s new law, are caught between term loan lenders who want sick companies to be liquidated and working capital lenders who favour restructuring the company, four people dealing with resolution of sick companies told ET.

The trouble might be that the law does not make a difference between the two, term loan lenders and financial lenders, and puts them on equal footing. However, the former have their loans secured and have the first charge of assets of a company that goes under.

In case of liquidation, term loan lenders with secured loans are backed by assets and they enjoy the first charge on these assets. Working capital lenders would be interested in revival of the unit, looking at the cash flows from the enterprise.

The conflict could well turn out to be a drag on the country’s mammoth resolution exercise as most cases may eventually go for liquidation on account of difference of views. The law demands 75% consent of lenders to come to any resolution or restructuring exercise. When this fails, liquidation becomes a fait accompli.

“The law puts all financial lenders, be it secured or unsecured, on an equal footing,” said Pavan Kumar Vijay, founder of Corporate Professionals, a Delhi-based firm that advises clients about bankruptcy proceedings. “Term loan lenders could be keen to liquidate the company as their loans are secured by first charge on immovable properties having better realisable value.”

“A company’s restructuring could only dim chances of their early recoveries,” he said. First charge allows lenders to claim their share of recovery first when a defaulting company is wound up.

At the heart is the differing motivations of senior secured lenders, typically term lenders, and junior secured lenders, typically working capital lenders, said Vinod Kothari, an insolvency practitioner.

"In terms voting rights, both have same voting rights, while their interests differ. This itself may create situations of conflict, thus causing the resolution plan to fail," Kothari said.

The Insolvency & Bankruptcy Board of India has so far listed 100 cases for resolution, and those were listed in January will soon complete the initial 180-day period and if resolution fails within this period, they may get extension of a maximum of 90 days. Failure in arriving at a resolution even after 270 days means the company would be necessarily liquidated.

For instance, a mid-size company that went to National Company Law Tribunal is facing the same dilemma. Among a 14-bank consortium, only one bank has exclusive charge, highest right over the company’s loan collaterals. The bank with exclusive charge is insisting on liquidation, said an advisor involved in the processes, while the 13 others are seeking restructuring.

“Such disagreement may adversely affect the insolvency resolution process under the Bankruptcy Code,” said Souvik Ganguly of Acuity Law. He however said that if the right resolution plan is adopted, secured lenders may benefit more as recoveries from a going concern should be higher than when liquidated.

“The valuation of collateral securities is the key trigger for secured lenders insisting on liquidation,” said Navneet Gupta, a Delhi-based insolvency professional. “If the current market valuation of underlying assets is lucrative enough, it is natural for them to go for liquidation. But, unsecured lenders come at the fourth rank in waterfall when a company goes to liquidation,” he said.

Meanwhile, asset reconstruction companies, which have bought bad loans from banks at discounted prices, are weighing their options between the two warring group of creditors as they look for appreciation of the company’s value.