A resolution professional (RP) has levelled allegations, through a filing at the National Company Law Tribunal, or NCLT, against the promoters of Binani Cement. The allegations are that the promoters used fraudulent transactions to siphon off money from the company through the usual methods — loans at preferential rates and capital advances, for example. There has, as yet, been no formal investigation of these allegations, and the company itself has not had a chance to answer them properly. Thus, nothing can be said about whether they are true. However, they have been made at a fraught time for the Binani Cement bankruptcy process, and they have made the resolution of the problem considerably more problematic. One major issue is that the assets, in the auction process under the Insolvency and Bankruptcy Code, or IBC, were awarded to a consortium headed by Dalmia Bharat Cement. But since that decision was made, another possible purchaser has emerged — UltraTech Cement. The latter has proposed a deal that may be preferred by the lenders. Naturally, the entire process has been thrown into confusion, which has further been deepened by the new allegations against the Binani Cement promoters.
The Binani Cement process raises two important questions. First, should not the auction principle remain at the centre of any resolution undertaken under the IBC? The allegations against Binani Cement's promoters have led UltraTech Cement to claim that the auction was held under incomplete or incorrect information and should thus be cancelled. The implication clearly is that the UltraTech Cement deal should be initiated in preference. This, of course, would be hotly contested by Dalmia Bharat Cement, the winning bidder. As things stand, one cannot rule out a lengthy court case as a result. The larger question here is simple. The purity and efficiency of the IBC process require all possible purchasers of assets to be on an equal footing. This requires an auction. Deals outside the auction process should not be permitted even if they appear to be better for creditors in a particular case. It is entirely possible in such cases for the unscrupulous to manipulate the nature of the information that is made available about a company, and the time when the information is released, in order to swoop in and negate an auction result. In order to disincentivise this and similar behaviour, it should be made clear that the auction process is the only method that can be used. Equally important is to ensure that formal auctions allow for multiple rounds of bidding if needed. Otherwise, it will militate against price discovery.
The second question that must be asked is whether the IBC is in danger of descending, like the process it was meant to replace, into a morass of hard-to-adjudicate legal disputes. Complex legal questions will likely, given the constraints on courts, make a mockery of the schedule built into the IBC. The blame for this eventuality should lie squarely with the government, which introduced the IBC without the necessary capacity-building for resolution alongside. The finance ministry should work to correct its error.