Introduction

On August 27, 2021, the Insolvency and Bankruptcy Board of India (‘IBBI’), issued a discussion paper(‘Paper’), on certain issues related to Corporate Insolvency Resolution Process (‘CIRP’). Inter alia, the Paper proposes use of Swiss Challenge Method (‘SCM’), in CIRP, for maximising the value of stressed assets of the corporate debtor.

In this article, we present a basic understanding of SCM and jurisprudence on SCM in India in CIRP as well as the pre-pack insolvency resolution process (‘PPIRP’).

What is SCM?

SCM is a process of bidding or public procurement where the bidder makes a bid on its own to the auctioneer. Post approval of the bid, competing proposals are made against the original bidder and the auctioneer chooses the best bid. In doing so, opportunity is provided to the original bidder to match the competing bid, else the best amongst the competing bids is accepted. In its application to CIRP, the lenders or more specifically, the Committee of Creditors (‘CoC’), decides on the use of SCM for maximising the value of assets.

Probable use in CIRP

Once CoC decides to use SCM, the first approved resolution plan may be treated as the base plan. Thereafter, the details of the same are made public, calling for competitive plans within a specified time. Where a better plan is proposed, the proposer of the first plan is provided an opportunity to match the same. Alternatively, a base plan could be proposed at the beginning, with an invitation to the resolution applicants to out-bid the same. This model would be similar to the one used within the PPIRP framework.

Alternatively, a two-step bidding could be done. The details of the highest bid in the first round of bidding are made public, inviting a second set of bids; if during the second round of bidding, the original bid is surpassed by a challenging bid, the highest bidder in round one would be provided an opportunity to match the same. On failure to do so, the highest bid in the second round would be approved.

Due to competitive bidding, the impact of using SCM is maximizing the value of the assets under stress. There are not enough statistics yet to understand the benefit of SCM in CIRP yet.

Use of SCM in CIRP

SCM has been used by several State Governments, in public infrastructure projects such as the development of hyperloop in Maharashtra. The use of SCM is recognised by the court in Ravi Development v. Shree Krishna Prathisthan and others. When it comes to insolvency, SCM has been used in PPIRP as well as CIRP.

CIRP

The courts have taken differing opinions on use of SCM during CIRP. IBC and the rules and regulations prescribed thereunder, do not contain any specific provision recognising SCM as a method of approving resolution plans. For this reason, NCLT, Mumbai in Saket Tex Dye Pvt. Ltd. v. Kailash T. Shah, observed that SCM cannot be used in approval of resolution plan as the only manner is laid down in IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’).

Similarly, Delhi High Court in MRG Estates LLP v. M/s Amira Pure Foods Pvt. Ltd., dealt with a casewhere the petitioner insisted on use of SCM by the liquidator for sale of assets. Although the court disallowed use of SCM due to absence of any statutory recognition, it issued directions to IBBI to consider the petition as a representation for adoption of SCM within the CIRP Regulations.

Conversely, NCLT, Mumbai in Bank of Baroda v. Mandhana Industries, expressly directed the use of SCM.

Regulation 39 of CIRP Regulations provides for approvalof resolution plans by CoC. However, it does not specify any particular method. Therefore, there appears to be no bar on use of SCM within the regulations.

PPIRP

SCM has been introduced in pre-pack insolvency. As a pre-condition, there should be a base plan, which may be proposed by the promoters and where they are not eligible under Section 29A, from such other person as arranged by the CoC. The base resolution plan once approved, is submitted to the resolution professional. For using SCM, a binary approach is followed. First, the resolution plans that propose to pay operational creditors in full and second, the ones where only a portion of operational creditors’ claim is proposed to be recovered.

In the former, discretion is vested with the CoC to use SCM, whereas in the latter it is mandatory for the CoC to resort to SCM. While using SCM, the CoC then releases the commercials of the base plan and invites resolution plans challenging the base plan. Out of the two plans, the one with a better weighted average score is accepted. If the challenging proposal is better, the promoter is given an option to improve its plan, and on doing so, the challenger is given an opportunity to improve the plan further. This continues until either of the parties quits. The aim of this method is to maximise the value of the stressed assets.

Conclusion

The use of SCM in CIRP has received mixed response from the courts, on account of lack of statutory recognition. There is also a lack of adequate data on SCM actually resulting in maximisation of assets, and whether it also results in equitable distribution of assets between different classes of creditors. The Any route to SCM, whether with base plan or a two-step bidding process or any other mode, must be done keeping sight of the fundamentals of CIRP such as the time-bound resolution of stressed assets.

Source: http://www.lawstreetindia.com/experts/column?sid=622