CONFIDENTIALITY CLAUSE: A LOST CAUSE?
This post is authored by Kunal Gupta, a third-year student of B.A. LL.B. (Hons.) at National Law School of India University, Bangalore.
Recently, the National Company Law Tribunal (“NCLT”) and the Appellate Authority (“NCLAT”) have raised doubts over the ‘confidentiality’ of the liquidation value of the assets of Videocon and 12 group companies. NCLAT in the recent order dated 19.07.2021 has put a stay on the implementation of the NCLT approved resolution plan by Vedanta group’s Twin Star Technologies to take over Videocon. The matter reached NCLAT when two dissenting financial creditors, namely Bank of Maharashtra, and IFCI Ltd. challenged the order passed by the Mumbai Bench of NCLT.
One of the grounds raised by the dissenting creditors in the appeal is the alleged breach of confidentiality clause as regards the liquidation value of the defaulting company. This has given rise to an interesting analysis of the effectiveness of Indian Insolvency Law to do justice to the creditors in case of such a breach. It also puts light on the need for the Insolvency and Bankruptcy Board of India (“IBBI”) and the legislature to add to the existing law on the confidentiality clause.
2. THE VIDEOCON CASE AND THE EXISTING LAW
It was argued by the dissenting financial creditors before NCLAT that there had been a breach of confidentiality clause as the liquidation value was leaked beforehand. However, the only premise to base this conclusion on was the surprising closeness of the liquidation value, and value of the resolution plan submitted by Twin-Star Technologies. The liquidation value of Videocon Industries and its group companies was Rs. 2,568.13 crores while the bid submitted by Twin-Star Technologies was Rs. 2,962 crores. The contention was regarding the close difference between the two values as the general tendency is to accept the plans which are above the liquidation value.
Let us take a look at the existing law in this regard. Section 30(2)(b) of the Insolvency and Bankruptcy Code, 2016 ("IBC") requires that each resolution plan “provides for the payment of debts of operational creditors in such a manner which shall not be less than the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53.” Thus, the operational creditors need to receive at least the amount that they would have, in case of liquidation of the corporate debtor ("CD"). Liquidation value grants the negotiating power to the Committee of Creditors(“CoC”) since it is the one which the creditors would anyway get if they were to sell the assets off. Therefore, the plans approved are generally the ones whose value is more than that of liquidation.
The requirement of confidentiality emanates from Clause 35(2) of the Insolvency Resolution Process for Corporate Persons Regulations, 2016 ("CIRP Regulations, 2016") which requires the member of the CoC to maintain the confidentiality of the fair value and the liquidation value, and Clause35(3)which requires the resolution professionals and registered valuers to also maintain confidentiality regarding the same. In addition to the CIRP Regulations, Clause 21 of the Insolvency Professional Regulations, 2016 requires the professionals to maintain confidentiality regarding the insolvency process. Thus, Clause 35 envisages and requires that all those who are aware of the liquidation value keep its secrecy. This value is ascertained by two registered valuers (Clause 27 and 35) and the CoC members are informed of this value only when the bids are finalised.
3. ANALYSING CONSEQUENCES OF BREACH OF CONFIDENTIALITY
A confidentiality clause exists to ensure that none of the bidders are aware of the minimum value at which the plan would be approved, which is in the economic interest of the creditors of the defaulting company. If the liquidation value is publicly announced before the bidding process, the overall bids are likely to come down which is not in the good interest of the creditors who initiated CIRP as they would have to eventually face larger haircuts. Moreover, if this value gets leaked only to some of the bidders, that would also violate the principle of fairness by affording advantage to selected members.
There is no doubt and contention as to the necessity of such a clause in the insolvency process under IBC. It promotes the interests of the creditors and endorses fairness. However, the breach of this clause is not at all in the best interest of the creditors as the IBBI rules are insufficient to bring back the status quo ante, i.e. the position of the creditors before the breach in confidentiality clause.
In the Videocon insolvency case, there were hints towards a probable leak of liquidation value and there is no evidence as of now to support the claim. It is inferred from the closeness of the liquidation value and value of the resolution plan by the Vedanta Group’s arm. This is more likely to be a coincidence as there were 11 bids and this one was the best.
3.1 Shortcoming In the Law
Recently, on 20th September 2021, the creditors of the Videocon viz. SBI, etc. approached NCLAT on behalf of the CoC seeking fresh bids for the Resolution Plan for the Videocon (CD). Among other things, there is a possibility that this step was owing to the alleged breach in confidentiality clause due to which they are receiving close to 95% haircut in the existing resolution plan by Vedanta group. To analyse the consequences of the breach of such clause, there is a need to assume that there was an actual breach, unlike in the actual case where it is merely an allegation till now. Taking this assumption, this paper would be highlighting the adverse ramifications on the SBI and other lenders if NCLAT orders for a rebid in the interest of fairness. Now, the interesting state of things would be that the liquidation value of Videocon is already known to the bidders as the same as mentioned in the NCLT order which is easily accessible. It is ironic but as a consequence, the bids are more likely to be closer to the liquidation amount, perhaps even closer than the earlier bid of Twin Star Technologies which was Rs. 2,962 crores.
For explanation, consider this illustration. If the liquidation value of a company is 100 and the best bid is 110. In case of a breach, the CIRP is vitiated because of the proven breach of a confidentiality clause, the next set of bidding is likely to go even lower since the bidders are now abreast of the minimum value which their bids need to fulfill. Let’s say the new bid would likely turn out to be 105. This would be detrimental to the interests of the creditors, especially in Videocon’s matter, where the total haircut to all the creditors is 95.85% and the haircut for the operational creditors is massive 99.28%. Many of the operational creditors are MSMEs who are likely to go bankrupt if they do not receive an adequate amount out of Videocon’s liquidation. In such a grim situation, a further lower value of corporate debtor would take away the last few straws which such drowning operational creditors had clung to.
Another cause of concern is the depreciation of assets. As the time-lapse, the value of assets would depreciate, leading to an even lower liquidation value. Section 2(k) of the CIRP Regulations, 2016 defines ‘liquidation value’ as “the estimated realizable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the insolvency commencement date.” Thus, the value of assets has a direct correlation in computing it. Continuing the illustration above, the liquidation value which was earlier 100 is likely to go down to 95. Such a decrease can be reasonably expected which will lead to bidders proposing even a lower value in the resolution plan. This would be followed by the unintended consequences of lower bids leading to more haircuts. In the present matter, ten months have already elapsed from 11.11.2020, the date on which Twin Star’s resolution plan was approved by the CoC, which would have undoubtedly depreciated the value of assets.
4. WAY FORWARD
A proven breach of confidentiality clause gives rise to a catch-22 situation. If the entire bidding process is not vitiated, then the process would be biased and principles of fairness on which the CIRP is based would be compromised. However, conducting the entire process again after a while leads to undesirable consequences as well. It not only reduces the liquidation value due to depreciation of assets but also results in resolution plans of even lower value from bidders as the original value is already out in the public. This would be detrimental to the creditors as they would have to face further haircuts, which would be a dismal situation for the financial and operational creditors of Videocon as they are facing an overall haircut of more than 95% and can recover merely Rs. 2,962 crore out of the total gigantic debt of Rs. 64,838 crore.
It is a choice between the devil and the deep sea as both of the possible options lead to unintended consequences in the current framework of (lack of clear) law. To solve this issue, we need to adopt a lesser evil and bring amendments to the IBC and CIRP Regulations accordingly.
The author suggests that the practical solution is to not conduct CIRP again. This is because when all the Resolution Applicants (“RAs”) are aware of the liquidation value owing to the breach, all of the applicants are on the same pedestal (albeit on a lower one), and conducting it again would only worsen the situation. Also, when only some of the applicants are aware of the value before making bids and that applicant wins as well, even then there is no need to conduct CIRP again as the liquidation value only helps to quote the lowest possible acceptable price and not actually help one win. Ergo, the other RAs are not being wronged, however, the creditors to CD need to face more haircuts. Since there is no way to go back to the status quo before the breach, and conducting subsequent CIRP will only exacerbate the losses, it is better to not vitiate the first CIRP. Nevertheless, there must be an amendment to specify the punishment for those breaching confidentiality to ensure the person(s) doesn’t go scot-free. The fine levied should be considered based on the valuation of the Corporate Debtor and should be enough to act as a deterrent. Deterrence via strict laws is the best possible way to deal with a breach of the confidentiality clause.
These changes in the law would ensure that the process is done promptly (by eliminating the need to conduct subsequent CIRPs) to prevent further depreciation of the CD. This proposed solution would also discourage the frequency of such breaches as it is accompanied by hefty fines. This article depicted the most likely consequences of the breach in confidentiality clause and points towards the shortcomings in the IBC, 2016 and IBBI Regulations, 2016. Insolvency law in India recently completed 5 years and is an evolving law with numerous grey areas. The best way is for the IBBI and the Legislature to take note of such deficiencies as and when they arise and gradually take the law to perfection.