On 23rd Jan 2016, history was set to roll out as Ms Mamta Binani filed CP/IB/ Number ONE, u/s 10 in Hyderabad bench of NCLT.
On the respondent side, were No.1 Edelweiss ARC, No.2 Millenium Finance Ltd, No.3 Synergies Castings Ltd, No.4 Alchemist ARC and No.5 that is the Corporate Debtor Synergies Dooray India Ltd, to be put into the insolvency process.
The other four respondents were Financial Creditors to the Corporate Debtor, of which Respondent No. Three is the most intriguing, set to play the core role as the story would unravel over the insolvency period of six months.
The petition as we would have noticed was the first case to be filed in the newly unveiled Insolvency & Bankruptcy reforms. Ms Mamta Binani is an expert with all the experience. To begin with she is B.Com (Hons), FCA, FCS, ACMA, PGDBM (IIM-C). Not just that she is been a practicing chartered accountant for almost two decades and has been the Chairperson of the East India Regional Council of The Institute of Company Secretaries of India in 2010.
She is the first lady to have held such a position, amongst all the three Institutes namely, The Institute of Chartered Accountants of India, The Institute of Costs & Works Accountants of India and the Institute of Company Secretaries of India in the Eastern Region.
Most important for the insolvency petition that she had filed, Ms Binani is the First in India to pass the Limited Insolvency Examination. The case was in able hands and everyone watched the developments on the stage.
Synergies Dooray Automotive Ltd (or SDAL), was incorporated on 14th June 1995 with the ROC Hyderabad, its Registered Office being located in the bustling Ameerpet, while the factory where it manufactured automotive spare parts, was located in Vishakhapatnam. Incorporated on 24th Jan 2005, with the ROC Hyderabad, Synergy Castings too has its wheel casting manufacturing based in Vishakhapatnam.
As it expanded business, its capital structure got skewed with repeated borrowings. The most recent balance sheet, i.e. March 2016, shows the paid up capital SDAL at 19.59 cr.
Eventually to bring some sanity in the highly leveraged balance sheet, the company leased its assets to the SPV, Synergies Casting Ltd in 2005, which to reiterate is the Respondent No. Three in the CIRP petition.
Two years after the lease agreement with Synergies Casting Ltd, Synergies-Dooray Automotive Ltd was declared a sick company in 2007 under the now repealed SICA.
Sick industrial unit was defined as a unit or a company (having been in existence for not less than five years) which at the end of any financial year may have incurred accumulated losses equal to or exceeding its entire net worth. An industrial unit was also regarded as potentially sick or weak unit if at the end of any financial year it had accumulated losses equal to or exceeding 50 per cent of its average net worth in the immediately preceding four financial years and failed to repay debts to its creditor(s) in three consecutive quarters.
It is to be noted, that sickness was linked to networth and not directly to any default triggers.
Once a sick company was admitted into the BIFR Hospice, then no proceedings for winding-up of the industrial company or for execution, distress or the like against any of the properties of the industrial company could be made. It was literally like a sick man lying in a hospice not be disturbed with any bad news.
Also, no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company was allowed to be proceeded with further. The sick unit was molly coddled to the end.
The way the system operated in India, it let the Sick Company function for ten years, which is a surprise in itself, as the sick unit bled but could not exit.
However, during this time period, there were various attempts at financial restructuring to bring the company back into black. The lenders to the sick Company assigned their debts constituting over 90% of the outstanding debt on the balance sheet to Synergies Casting, the SPV. The corporate relationship between Synergies Dooray and Synergies Castings deepened in an attempt to find synergies. It helped that there were synergies both at the board level and also in the business space that they operated.
Eventually the original lenders moved out as two large Asset Reconstruction Companies, Alchemist ARC and Edelweiss ARC took over the papers.
In 2016, November 24th an NBFC, Millenium Finance, based at Panjagutta, Hyderabad and incorporated in Dec 1995, entered the picture. Dramatically!
The debt that Synergies Casting had taken from Synergies Dooray was in turn assigned to Millenium Finance, not the entire book, but 92% of the book. Synergies Casting sold Rs 750 cr debt to the finance company at a deep discounted consideration of Rs 40 cr.
In the process it must have booked a significant amount of capital loss. But it retained a small part, about 90 cr, of debt on its books. So it continued to be a Financial Creditor in Synergies Dooray and therefore it happened to be Respondent Number Three in the CIRP petition filed by Ms Binani.
As a matter of coincidence, two days after the transaction between Synergies Castings and Millenium Finance was executed on 24th Nov, SICA was repealed on November 26th, 2016.
Soon after Millenium Finance had entered into the picture, the Board of Synergies Dooray decided to file an insolvency application u/s 10 of the Code.
At that point of time the number of registered insolvency professionals in India were limited, but from the small universe, the Board of Synergies Dooray selected the best, Ms Mamta Binani, a professional with experience and expertise.
At that stage, the Company had Rs 972.15 cr debt outstanding on its balance sheet. There were four creditors, but none of the creditors approached the NCLT with an insolvency application. The Corporate on its own filed an application for insolvency u/s 10 of the Code.
On 23rd Jan 2017, Ms Binani made history when she filed the CIRP petition on behalf of Synergies Dooray in the NCLT Hyderabad bench which was admitted as the application was complete in all respects. She had done a thorough job; providing required financial information, details of herself including her consent to act as Interim Resolution Professional in the Insolvency Process.
It marked the beginning of the most controversial case in the newly implemented Reform, which also had another claim to fame, as the first case to commence insolvency proceedings and to be closed by the Adjudicating Authority as a successful Resolution. The Act has Resolution enshrined as its Holy Grail.
“An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets…”
From the date of her appointment, Ms Binani controlled the management of the Corporate Debtor.
It is the job of the Interim Resolution Professional to ensure that all the debts of the corporate are accounted for and treated fairly in the Insolvency Process.
She collated all the information of the corporate regarding business operations, balance sheet transactions. She issued a notice for the attention of all the creditors of the Corporate Debtor.
“Notice is hereby given that the National Company Law Tribunal Hyderabad bench has ordered the commencement of a corporate insolvency resolution process against M/s Synergies – Dooray Automotive Ltd on 25-01-207.
The creditors of M/s Synergies – Dooray Automotive Ltd are hereby called upon to submit a proof of their claims on or before 08.02.2017 to the Interim Resolution Professional at the address mentioned about against item 8.”
There was no legal requirement to look into the debt transfer transaction that had happened between Synergy Castings and Millenium Finance, about a month before the CIRP petition was filed.
Yes, if there was any transaction between the Corporate Debtor and Synergy Castings it would have come on the radar. Even a transaction between the Corporate Debtor and Millenium Finance, would have blipped. In either scenario the RP would be required to investigate the Preferential transactions as outlined in Section 43 of the Code.
But not a transaction between Synergy Casting and Millenium Finance.
As such the Committee of Creditors was formed with Edelweiss, Alchemist, Millenium Finance, and Synergies Castings Ltd.
In the first meeting, on the first agenda (u/s 22(2)) Ms Binani was confirmed as the Resolution Professional by the Committee of Creditors, with more than 75% vote. (this was before the Second Amendment and hence 75% was the requirement). Millenium Finance itself had 76.33 percent voting share on the basis of its proportionate share of outstanding debt amongst the creditors eligible to be in the Committee.
Eventually Ms Binani published the Information Memorandum and invited Resolution Applications. Three entities submitted their Plans to resolve the insolvency of Synergies Dooray, viz. SMB Ashes Industries, Suiyas Industries Pvt Ltd and Synergies Casting Ltd.
The Creditor Committee rejected the plans of the two entities and with certain modifications accepted the Resolution Plan submitted by the third entity. Edelweiss ARC dissented and abstained from voting.
The Resolution Plan so approved envisaged business continuity of the corporate debtor, through Financial Restructuring, Operational Restructuring, Capital Restructuring, Payment to Operational Creditors and Statutory Dues, Infusion of fresh funds by the promoters, Payment of Insolvency process costs including the fees of the Resolution Professional.
Synergies Dooray Automotive Ltd, the corporate debtor was to be amalgamated into its subsidiary, Synergies Castings Ltd, based on the Resolution Plan approved by the Committee.
The merged entity was accorded a series of concessions,
1. The State Government of AP exempted the merged entity from levy of Stamp Duty on the value of assets transferred.
2. Sales Tax Dept accepted the repayment of outstanding amounts in equated annual installments, without any penal interests.
3. Synergies Casting was exempted from the provisions of Sec 79 and entitled to carry forward losses and unabsorbed depreciation as per Sec 72 A of IT Act.
On the total debt of Rs 972 crore, it amounted to a haircut of 94.37%. Synergies was the first case and the most controversial. The whole matter had moved through the Resolution journey in a smooth, timely and legal manner, completed in 191 days.
This was the first case the NCLT had decided upon. The other creditor Edelweiss ARC, who was to get 4.89 crore in three annual instalments against its debt book of 86.92 cr, approached the NCLAT against the NCLT decision without any success.
A year after the Code had come into effect, on 16th Nov 2017, the Insolvency Law Committee was constituted, with the mandate,
“to take stock of the functioning and implementation of the Code, identify the issues that may impact the efficiency of the CIRP.”
The abnormally high haircut suffered in the case of Synergies was brought to its notice.
It was suggested to the Insolvency Law Committee that creditors who have acquired debt by any assignment of debt within a year prior to commencement of insolvency should be excluded from the CoC. That is Millenium Finance would have been excluded from the COC of Synergies Dooray.
However, the ILC felt that given the limited experience of interpretation of provisions of the Code by practitioners as well as adjudicating authorities, the protection in section 21(2) whereby any related party to whom the corporate debtor owes a financial debt is excluded from the CoC is sufficient to ensure that the CoC is not sabotaged by the promoters and other related parties of the corporate debtor.
Furthermore the other side of the argument is equally strong, when there is a genuine transaction and a creditor has in a scrupulous transaction acquired a debt paper, but would be denied the Committee vote simply because the issuer had gone into CIRP within a year of the transaction.
The other deduction that came from the case, that for the purpose of determining the voting share in the Committee, the value of the debt should be taken as the amount paid by the buyer of the debt book, rather than the value of the debt in the Corporate Debtor’s books. It would have meant that Millenium Finance would have got voting share corresponding to Rs 40 cr, that it had paid to acquire the debt portfolio from Synergies Casting and not voting share corresponding 792 cr which was the value of the debt in the Corporate Debtors books.
This too has implications on either side being a commercial contract problem.
However neither are the authorities completely idealistic. The Insolvency Law Committee did make couple of relevant recommendations on the basis of the learnings from the specific case.
In particular the provision pertaining to related party required to be amended,
“financial creditors that are regulated by a financial sector regulator and have become a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares of the corporate debtor, prior to the insolvency commencement date.”
Furthermore Section 29A was also inserted in the Code that details the criteria for banning certain entities from participating in an Insolvency Resolution Process.
This would help in ensuring that the doors are firmly shut on unscrupulous promoters who may attempt to buy their own assets through alternate routes at deep discounts by inflicting substantial haircuts on the Creditors.
The Committee of Creditors for Synergies Dooray met only twice in the entire Insolvency process of Synergies Dooray; first on 22nd Feb 2017, when it had appointed Ms Binani as the Resolution Professional and thereafter on 24th Jun 2017 when it approved the Resolution Plan submitted by Synergies Casting. The process moved smoothly complying with all the regulatory requirements within the prescribed timelines to achieve Resolution.
The Resolution Plan worked out to be Rs 54 cr to be paid out in three interest free annual instalments. The first payment of Rs 50 Lakh to be made from the realization was the cost of the Resolution Professional, to Ms Binani.