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Bidders for stressed assets have warned that the current interpretation of the Insolvency and Bankruptcy Code — according priority to the interest of lenders while ignoring non-financial creditors — could lead to legal challenges. As of now, lenders are sending defaulters to the National Company Law Tribunal (NCLT) for debt resolution, but, in the process, are blocking the receivables of suppliers, which are an important cog in a company’s production cycle. Some companies have defaulted to their suppliers in the order of billions of rupees and are sitting on huge losses. “Neither do non-financial creditors have any say in decision-making nor do they stand high in rank of repayment if stressed assets are to be liquidated. In almost all cases, non-financial creditors will lose their claim, both in the resolution plan and in liquidation,” said a corporate lawyer, adding, “This can be possible if more weight is given to revive the company via equity infusion instead of paying banks cash upfront.” Bidders such as JSW Steel are also of the opinion that while the upfront cash paid by the bidders will be used to repay bank loans, more weight should be given to infusion of equity into the company, so that it can be revived and the interests of all parties are protected. “The intention of saving the stressed assets through resolution plans is to provide oxygen to such companies after the burden of debt is taken off their shoulders.
However, if non-financial creditors, which do not have any legal rights of recovery, are not treated fairly, they are bound to challenge the resolution plan even if it is approved by the committee of creditors. This will eventually defeat the purpose of the code,” said another lawyer. The code says the process is intended to balance the interests of all stakeholders and the resolution plan is also required to make a statement as to how it has dealt with these interests. Thus, it will be prudent for resolution professionals and the committee of creditors to satisfy this requirement. “There is a strong apprehension that in the absence of any scores for the requirement, the resolution plan can give non-financial creditors a raw deal in order to please other creditors who secure better scores and are part of the decision-making,” said a bidder. As of now, of the 12 big stressed assets identified by the Reserve Bank of India in its first list, resolution professionals have received resolution plans for most, but almost all are targeted at protecting interests of the lenders. “The code and the regulations do balance the interests of stakeholders, such as protecting the rights of secured creditors over others and giving financial creditors primacy in decision-making through voting. But if these regulations are not applied in a proper manner, this may result in unfair treatment to non-financial creditors,” said another bidder.