NCLAT Clears Decks For RCaps Second Auction

Vistra ITCL, one of the secured creditors of Reliance Capital, approached NCLAT appealing the National Company Law Tribunal (NCLT) ruling, which declared the second e-auction a violation of bankruptcy rules.

While staying the NCLT order, the appeals court bench comprising Justice Ashok Bhushan and Justice Barun Mitra said the NCLT ruling was an error.

“The CoC may proceed to fix a date after two weeks for holding a revised challenge mechanism or/and to take any steps for further negotiations with the resolution applicants," the order said.

The legal tussle between Torrent Investments and Reliance Capital lenders started after Torrent submitted the highest bid of ₹8,640 crore for Reliance Capital’s assets, with the Hinduja Group’s bid the second highest. However, the Hinduja Group sweetened its bid to ₹9,000 crore. After this, the CoC decided to propose an extended challenge mechanism to secure higher value for the bankrupt company.

Meanwhile, NCLAT also allowed a further exclusion of 30 days from the resolution process.

“We conclude that even after completion of the challenge mechanism under Regulation 39 (1A) (b), the CoC retain its jurisdiction to negotiate with one or other resolution applicants or to annul the resolution process and embark on to re-issue RFRP. Regulation 39(1A) cannot be read as a fetter on the powers of the CoC to discuss and deliberate and take further steps of negotiations with the resolution applicants, which resolutions are received after completion of Challenge Mechanism", the 80-page order by the bench said.

The order said that the CoC is fully empowered to further negotiate with one or more resolution applicants, even after completion of the challenge mechanism on 21 December 2022, and the decision of the CoC taken on 6 January to undertake an extended challenge mechanism is not violative of Regulation 39(1A).

On 2 February, NCLT upheld Torrent Investment’s plea challenging the second round of auction for Reliance Capital. “There is a paramount need to stick to the sanctity of the timelines prescribed under the IBC. As reiterated by the NCLT, timelines have to be adhered to in the resolution process," said Nirav Shah, a partner at law firm DSK Legal.

Shah said that Torrent’s limited point was that CoC would have rejected Torrent’s bid if it was unfair and not submitted within the prescribed timelines.

“Once having accepted Torrent’s plan, they cannot now object to delay in Torrent’s submission of the plan. Lenders’ argument that timelines are directory and cannot override value maximization is a good argument per se, but it is a difficult one to contend this once CoC has passed Torrent’s resolution plan. Following the NCLAT’s order, Torrent is most likely to challenge the order before the apex court," Shah said.

Furthermore, the bench also observed that even if Torrent’s resolution plan was the one with the highest net present value (NPV), it had no right to insist that the plan should be put to the vote by CoC without taking any further steps.

Torrent’s submission was mainly on the aspect that if multiple bids are entertained through conducting rebid, it is likely that serious bidders will not participate in such auctions as there will be no sanctity, which would further reduce realizations of IBC resolutions.

On the other hand, it was argued that bidders that actually participate in the IBC process would be tempted to not provide their best and final bid in an auction and attempt to better their bid by submission of a revised bid after the auction deadline after having observed the highest bid in the auction.