Minority debt holders with superior security led by
Asset reconstruction Company have alleged that the distribution of the proceeds from the sale of the power company is against the tenets of the Insolvency and Bankruptcy Code and designed to favour creditors with inferior security such as (PFC) and – who hold 41% of the debt.
The resolution professional, Saurabh Kumar Tikmani backed by KPMG, invited lenders last week to vote on the resolution plans given by the PFC-REC team,
and . The voting will end on December 30.
Distribution TUSSLE
Lanco Amarkantak, which has been undergoing bankruptcy proceedings, comprises three phases. The first phase has two units of 300 MW each of which is operational, while the second phase, which has two units of 660 MW each, is under construction. The third phases have two units, each of 660 MW which is at the conceptualisation stage.
The company has generated ₹1,400 crore cash and ₹300 crore receivables solely from the operation of phase one units which are exclusively charged with Edelweiss ARC,
and .
Despite this, most lenders, including PFC, REC and
, decided to distribute the proceeds from the sale of the power company in the ratio of the admitted claim, said people aware of the matter. Distribution of proceeds based on claims will significantly lower the recovery for phase one lenders, who have referred the matter to the Hyderabad bench of the NCLT.
Interestingly, the PFC-REC team also emerged as the highest bidder for Lanco Amarkantak offering an upfront payment of ₹3,020 crore at an auction held on December 1. Adani Power and Reliance Industries, which were in the fray, boycotted the auction. Both expressed dissatisfaction over the last-minute changes in the bidding process that favoured the majority lenders, the PFC-REC team, who was also a resolution applicant, as reported by ET on December 2.
“The decision on the distribution mechanism is in complete disregard to the security structure,” said a legal expert dealing in insolvency cases. In Essar Steel’s resolution, the Supreme Court ruled that distribution should be based on the quality of the security held by the lender. Thus, Standard Chartered Bank received 2% of proceeds due to the inferior security it held, despite having a 7% voting share.
Edelweiss ARC declined to comment, stating that the matter is pending in court.
SPLIT VERDICT
The Hyderabad bench on October 19, comprising VRD Nandula as a judicial member and VBR Arekapud as a technical member, expressed divergent opinions regarding the appeal by phase one creditors. The matter is referred to a third referee member, who will hear the case on January 5.
The technical member directed the Committee of Creditors (CoC) to undertake an equitable mechanism of distribution of proceeds while instructing the RP to make a fresh estimation of the liquidation value since the company generated cash solely from phase one operations. Phase one creditors have sought a recomputing the liquidation value so that potential dissenting creditors receive a minimum amount.
“It is understood that the majority CoC, with its brute majority, bulldozed the previous proposal and arrived at the present mechanism, to the detriment of the lenders of Phase-I, thereby denying the said lenders the benefits that rightfully accrue to them by virtue of the lending agreements and commercial bargains that were entered into pre-insolvency,” the technical judge stated.
VOTING ON PROPOSALS
The CoC had earlier agreed to put on the vote two options on the distribution mechanism: based on security held and based on claims. But later, it modified the proposal and put only one proposal for vote based on claims.
When the company entered corporate insolvency in September 2019, the liquidation value arrived at ₹2,241 crore, wherein ₹1,146 crore was assigned for the first phase and ₹1,095 crore jointly for the second and third phases.
The legal counsel of the phase one lenders pointed out that the distribution of proceeds after recomputing the liquidation value is robbing the potential dissenting creditor of even its assured minimum safeguard.
The judicial member agreed that the modified distribution mechanism (based on admitted claims) “proposed by the majority lenders has been suggested as an afterthought solely to deprive the phase one lenders of the rightful entitlement of the proceeds from the resolution plan through an opaque and arbitrary mechanism”.
However, the judicial member also stated that CoC’s commercial wisdom is paramount because, at the 37th CoC meeting, 85.2% of lenders voted in favour of the distribution of the proceeds based on the admitted claims.
The RP has admitted ₹14,632 crore claims from 17 lenders.
