On Tuesday, the bankruptcy court ordered the liquidation of a civil construction company on the grounds that the approved resolution plan deprives the dissenting creditor of exercising its right to recover the remaining loan amount from the guarantor.
Kotak Mahindra Bank, which had 0.64% voting rights, objected to Ocean Capital Markets resolution plan since it would compel them to release third-party guarantees in favour of the resolution applicant without recovering their entire dues.
Lenders, 76.6% by value, approved Rs 180 crore offer, which was above liquidation value but below fair value.
Kotak Mahindra Bank objecting to the proposal stated that on receiving upfront payment, creditors must assign the entire security interest, including personal guarantee, corporate guarantee, and other security interests to the resolution applicant (RA). Lenders must also withdraw all legal suits with any court on approval of the resolution plan by the Adjudicating Authority.
The bankruptcy court noted that when the financial creditors (are) unable to recover their loan from the debtor, they have every right to proceed against the guarantors to recover the remaining loan amount. “This is the prerogative of the financial creditors, in the guise of a resolution plan the said rights of the financial creditors cannot be stripped off against their will,” the Cuttack bench of National Company Law Tribunal said in an order reviewed by ET.
“Without making any valuation, the transfer of such guarantees by way of assignment is arbitrary and is beyond the commercial wisdom of the committee of creditors,” the order stated.The resolution plan also stated that the RA would have the discretion over capital reduction, which indicates that the promoter of the defaulting company will continue holding a stake in the insolvent company while lenders would take a steep haircut. As per the waterfall mechanism under the Insolvency and Bankruptcy Code, equity holders are last in the queue to recover their money and can receive it only after lenders are fully paid.
“The capital reduction of the existing promoter group to zero is optional and at the sole discretion of the resolution applicant. Hence, this resolution plan is not a definitive one,” the order said.
During the hearing of the matter, the RA agreed to modify the plan and not to demand the release of the personal and corporate guarantees of dissenting and absenting financial creditors. The RA also agreed to delete the clause that allowed them to reduce promoters’ existing share capital to zero.
However, Kotak objected to this, stating that once the requisite majority of lenders approve a plan, the adjudicating authority can either accept or reject a plan, but it does not have the right to approve a plan with modification.