NCLAT Allows Another Round Of Bidding For Bankrupt Firm Reliance Capital

The National Company Law Appellate Tribunal (NCLAT) today allowed another round of bidding for the bankrupt financial services firm, Reliance Capital. The order will help the Indian lenders to seek better offers from the two bidders -- the Hinduja Group and Ahmedabad-based Torrent group.

The Torrent group is likely to challenge the order in the Supreme Court, said a legal source. The NCLAT said the Supreme Court has made it clear that the commercial wisdom of the CoC is paramount and hence it is setting aside the NCLT order.

Torrent had moved the NCLT appealing to stop the second round of auction after its offer of Rs 8,640 crore emerged as the highest bid for the company. The Hindujas made an offer of Rs 9,000 crore after the auction closed. After NCLT ruled in Torrent's favour, the lenders had moved the NCLAT.

Torrent argued in the NCLAT that the objective of IBC was to prevent prolonged negotiations conducted by the CoC under the garb of value maximization and curtail unnecessary delays on account of unsolicited bids and litigation that ensued.

The mischief caused by unsolicited late bids and consequent delay induced value destruction has been well recognized in the legislative materials and hence it's offer should be allowed, Torrent had said.

Lenders of Reliance Capital, on the other hand, have submitted before the NCLAT that the CoC is being prevented to discover the best price in the Corporate Insolvency Resolution Process (CIRP) and National Company Law Tribunal (NCLT) has acted in excess of its jurisdiction at a stage where even signed plans were not placed before the CoC for consideration.

In its written submission before NCLAT, Vistra ITCL said, "NCLT has usurped the jurisdiction of the CoC by holding that the CoC has to vote on the Rs 8,640 crore plan of Torrent and Rs 8,110 crore plan of IIHL (Hindujas) and that CoC has no jurisdiction to negotiate even on the figures."

It further argued that NCLT has not even looked at these plans and there is no Rs 8,110 crore plan of IIHL and NCLT has substituted its opinion for that of CoC, which is not permissible under the Insolvency and Bankruptcy Code (IBC).

Denial of the extended challenge mechanism and sale of Reliance Capital assets to Torrent at a value discovered in the first challenge mechanism would result in a loss of Rs 5,000 crores upfront monies to the banks, it said.

In their written submission filed with the NCLAT, the lenders have stated that Torrent is a private entity, while Reliance Capital has admitted claims of over Rs. 25,000 crores, most of which is public money.

This includes Rs 13,500 crores of claims belong to Life Insurance Corporation (LIC), Employees' Provident Fund Organisation (EPFO), other provident and pension funds, and Army Group Insurance Fund, and Torrent has sought unjust enrichment at public expense.

The lenders also argued that continued stay on the extended challenge mechanism will cause irreparable harm to the lenders. It has already resulted in an interest loss of over Rs 275 crores in the last six weeks, with a further loss of Rs 45 crores per week.

COC, in the exercise of its commercial wisdom, which is one of the core principles of IBC identified by the Supreme Court, has voted unanimously for an extended challenge mechanism, as the outcome of the first challenge mechanism was suboptimal and unsatisfactory.

The stay on extended challenge mechanism has foreclosed the COC from discovering higher value and has put the resolution process in suspended animation.

The lenders had argued that according to the terms of the auction, the COC has complete freedom to choose any method or process of negotiations, and one of such method can include a challenge mechanism and said there was no limitation on the number of methods of challenge mechanisms adopted. The auction rules sufficiently support the power of the lenders to hold multiple challenge mechanisms, it had said.

The lenders said that even if there was a successful resolution applicant, the COC is free to negotiate with other applicants, prior to voting.

In their submissions, lenders said Torrent misused the ex-parte order of the NCLT on January 3rd to rewrite its own resolution plan. On January 6, the company revised the upfront payment from Rs 3,750 crores to Rs 8,640 crores, while deliberately not making the COC a party in the NCLT.

The revised resolution plan of Torrent dated 6 January, with upfront payment of Rs 8,640 crores, was a "toppling bid", designed to score higher than Hindujas in an evaluation Matrix scoring, it said.

Reliance Capital was sent for debt resolution under the Insolvency and bankruptcy code in November 2021.