RCap Insolvency: SC Agrees To Hear Torrent Plea Against NCLAT Order

The Supreme Court has agreed to hear on March 20, the appeal filed by Torrent Investment Ltd against the National Company Law Appellate Tribunal (NCLAT) order allowing the second round of auctions of Reliance Capital assets.

With the apex court hearing underway, the second auction of Reliance Capital (RCap) assets scheduled for March 20 will not take place now, the lawyers privy to the matter told Business Standard.

The NCLAT on March 2 allowed another round of bidding for the assets of bankrupt financial services firm RCap. This was to help Indian lenders seek better offers from the two bidders, Hinduja group and Ahmedabad-based Torrent group.

The appellate tribunal said the SC has made it clear that the commercial wisdom of the CoC is paramount and hence it is setting aside the National Company Law Tribunal (NCLT) order.

Torrent had moved NCLT to stop the second round of auction after its offer of Rs 8,640 crore appeared as the highest bid. The Hindujas made an offer of Rs 9,000 crore after the auction closed.

After NCLT ruled in Torrent’s favour, the lenders moved NCLAT.

Torrent argued in NCLAT that the objective of the Insolvency and Bankruptcy Code (IBC) was to prevent prolonged negotiations conducted by CoC under the garb of value maximisation 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 recognised in the legislative material and hence, its offer should be allowed, Torrent had said.

RCap's lenders have submitted before the NCLAT that the CoC is being prevented from discovering the best price in the corporate insolvency resolution process and the NCLT has acted beyond 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 (India) — RCap’s secured lender — said, “The 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 the Rs 8,110-crore plan of IndusInd International Holdings (IIHL), a part of the Hinduja Group, and that CoC has no jurisdiction to negotiate even on the figures.”

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

Denial of the extended challenge mechanism and sale of RCap assets to Torrent at a value discovered in the first challenge mechanism would result in a loss of Rs 5,000 crore upfront to banks, it said. In their written submission filed with NCLAT, the lenders have stated that Torrent is a private entity, while RCap has admitted claims of over Rs 25,000 crore, most of which is public money.

This includes Rs 13,500 crore of claims belonging to Life Insurance Corporation of India, Employees’ Provident Fund Organisation, 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 lenders. It has already resulted in an interest loss of over Rs 275 crore in the past six weeks, with a further loss of Rs 45 crore per week.

The CoC, in the exercise of its commercial wisdom, which is one of the core principles of IBC identified by SC, has voted unanimously for an extended challenge mechanism, as the outcome of the first challenge mechanism was sub-optimal and unsatisfactory.

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

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

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

The lenders submitted that Torrent misused NCLT's ex-parte order on January 3 to rewrite its resolution plan.

On January 6, the company revised the upfront payment from Rs 3,750 crore to Rs 8,640 crore, while deliberately not making the CoC a party in the NCLT.

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

RCap was sent for debt resolution under IBC in November 2021.