Defaulting promoters attempt to stall bankruptcy proceedings on technical ground
Just when the end to the bank balance sheet clean up appeared to be in sight, there is a twist in the tale, or rather, an attempt to twist the tale.
When the first list of 12 large bankrupt companies were announced, one of the promoters openly said that they would be bidding for their own assets. While this shocked many, there was nothing illegal about it.
But the government then introduced an amendment to the Insolvency and Bankruptcy Code. Under the new rule, promoters of bankrupt firms, whose accounts had been nonperforming for a year, could no longer buyback their own assets. There was a small window of opportunity through which the promoters could bid but they would have to regularise their accounts by clearing the interest dues of one year.
However, reports say that many promoters of defaulting companies may approach the Supreme Court with a plea against the amendment. The plea is basically trying to capitalize on a technicality which says that once the Insolvency and Bankruptcy Code is triggered, there is a standstill clause that prevents them from settling dues of creditors.
Some bank officials have indirectly spoken in favour of the promoters saying that their not participating in the auction proceedings will reduce the price of the bids as the promoter is more likely to bid aggressively to ‘save’ his company.
The move is clearly an attempt by the promoters of these companies to delay the process of bankruptcy. These companies have had several rounds of negotiations with their lenders to resolve the non-payment of dues. The banks themselves have been criticised for ever-greening the accounts and delaying the inevitable after providing them loans way above the prudent norms.
The haggling between the banks and the promoters saw both sides not willing to take a hit on their respective books. The banks did not want a big haircut on their loans while the promoters wanted to pay back as little public money as possible.
The promoters who had failed to pay the banks despite repeated rounds of negotiations are now seeking more time to pay saying that the standstill clause is preventing them from doing so. If their intentions were right they would have made the payment by now and would have saved themselves the embarrassment of coming on the list.
Bankers also seem to be taking a short-term view of the situation by expecting the promoters to bid at a higher valuation.
First, is the assumption that others would not be willing to bid as high as the promoter. If the companies are in running condition, then any shrewd businessman would be keen to acquire it below replacement cost as it saves time and money.
Secondly, should the promoter who has run his firm to the ground and was not willing to pay up, be trusted again. Will these banks be comfortable in lending money to the same person again who refused to pay despite repeated requests?