The insolvency proceedings of Era Infra Engineering Ltd are a testimony to everything that is wrong with the Insolvency and Bankruptcy Code (IBC) - a set of laws whose main objective was to revive a debt-ridden company. Hailed as one of the biggest 'reforms' of the Narendra Modi-led government, the IBC is fast losing its cheerleaders as inordinate delays and unending litigation defeat the purpose - faster resolution of loan default cases - for which it was brought in at the first place.
Era Infra Engineering is a case in point. It is one of the 12 large loan default cases referred by the Reserve Bank of India (RBI) for resolution in June 2017 through the then newly implemented IBC. While all other cases have seen some kind of closure, either through resolution or liquidation, Era Infra is still work in progress - the Committee of Creditors (CoC) is yet to decide between the two plans.
Era Infra is an EPC (Engineering, Procurement and Construction) contractor engaged in execution of large highways, airports and industrial projects since the 1990s. It owes Rs 17,000 crore to 27 financial creditors (according to the latest updated claims as on August 31, 2020) and Rs 775 crore to operational creditors. Operational debts include direct and indirect tax dues, municipal fees, EPF dues, etc. The promoter of the Era Infra group - HS Bharana - was the CEO and chairman of the company when insolvency proceedings began.
The company had its first brush with insolvency proceeding in April 2017, when the National Company Law Tribunal (NCLT) gave its approval to start bankruptcy proceedings against it on the application of Prideco Commercial Projects, an operational creditor. However, the appellate tribunal stopped the proceedings in May on the ground that the operation creditor did not issue a demand notice of unpaid dues as required under the IBC.
A month later it was back in the ring, this time for a long fight. It has been more than three years now that the company has been looking for a resolution under the IBC, but there seems to be no end in sight.
The Question Of Law
Era Infra was among the Dirty Dozen to be referred to the IBC for resolution in June 2017 - the others being Jaypee Infratech, Bhushan Steel, Essar Steel, Alok Industries, Lanco Infra, ABG Shipyard, Jyoti Infrastructure, Monnet Ispat & Energy, Bhushan Power and Steel, Amtek Auto and Electrosteel Steel. While insolvency proceedings in all other cases started by July-August that year, it took almost 11 months for the NCLT to admit Union Bank of India's insolvency application against Era Infra.
So what took so long? One can call it the promoter's last-ditch attempt to save the company from going into insolvency, which would mean the actual owners losing control. The promoters moved the NCLT against the resolution application, citing over a dozen winding up proceedings pending against the company in the Delhi High Court. The promoters had raised the question of law: "Whether the process under Insolvency and Bankruptcy Code, 2016 can be triggered on the face of pendency of winding up proceedings or is it to be considered an independent process."
There were 29 such cases pending in high courts. The NCLT ordered the setting up of a special bench to decide the point of law. In February 2018, it was decided that the IBC was to prevail over the high court, but it took two months for the matter to be heard and given a final closure.
Ashwin Bishnoi, Partner, Restructuring and Insolvency, Banking and Finance, Khaitan & Co, says in the earlier years of the IBC, many points of law were not clear and hence some of the delays were justified. However, even after three years and despite most of the fundamental questions of the law having been settled, people still take chances. "What the NCLT, which is short of members, requires is that it should slam any frivolous petition and impose heavy fines," adds Bishnoi.
So, after almost a year of trials and tribulations, Era Infra's insolvency application was finally admitted by the NCLT in May 2018. Rajiv Chakravarty was appointed the Interim Resolution Professional, who was later also appointed as the Resolution Professional (RP) by the Committee of Creditors (CoC).
Claims And Counter-Claims
The admission of insolvency proceedings was just the beginning of a long arduous journey for the company and all others involved in the process - the resolution professional, CoC, employees, etc.
The next hurdle it faced was regarding the claims filed by ICICI Bank for loans given to two Era Infra entities - Era Infrastructure (India) Ltd (EIIL), a subsidiary, and Dehradun Highway Projects Ltd (DHPL), a special purpose vehicle (SPV). Promoters of Era Infra had promised to fund any shortfall in repayment of loan by both entities.
The Resolution Professional refused to admit Rs 700 crore worth of claims made by ICICI Bank as financial debt. The bank filed a petition and got a favourable judgement in December 2018. However, not content with the 'favourable' judgement, it went on to file an insolvency petition against EIIL. The NCLT noted that the claims filed in the insolvency proceedings by ICICI Bank against EIIL were based on the same set of facts and documents as was previously used by the bank to get its loans to EIIL admitted as financial debt in the insolvency proceeding of parent company Era Infra. The NCLT dismissed ICICI Bank's insolvency application against EIIL in an order passed in May 2019.
There were other operational creditors who kept filing insolvency petitions despite the fact that the proceedings under the IBC were already underway. In some cases, the petitioner did not even turn up on the day of hearing. Though the NCLT dismissed all 'frivolous' petitions, the process continued to be delayed. Sumit Batra, Partner at law firm India Law Alliance, says in most cases, operational creditors are getting 5-10 per cent of their claims and in some cases not even that. "That is the reason they try to stall the proceedings somehow or the other so that resolution applicants come up with some better offer," he adds.
According to Gaurav Gupte, Partner, Cyril Amarchand Mangaldas, a lot of these litigations can be attributed to the fact that the IBC has altered the rights of debtors and creditors and to some extent even between creditors. "As may be expected in any new law that so significantly alters existing rights, there are bound to be legal challenges, and some time will be spent in adjudication of such challenges."
Then there are claims of other creditors such as NTPC, SAIL, BHEL and NALCO worth over Rs 2,800 crore, which are still under adjudication. In one case, NTPC has even moved the Supreme Court. There is arbitration going on between NTPC and Era Infra. Era filed its claims, which are still under adjudication. NTPC filed a counterclaim and asked the RP to admit the claim. The RP refused, saying the claim cannot be admitted since NTPC was not an operational creditor. NTPC then moved the NCLT and the NCLAT, but both dismissed its plea. Finally, it moved the Supreme Court, which on August 11 put a stay on the insolvency proceedings.
Brush With Authorities
Like in most cases, the biggest challenge for the resolution professional has been to deal with statutory dues - dues of government departments such as income and commercial taxes, electricity boards, EPFO, municipal corporations.
Era Infra had its fair share of troubles with government departments. The income tax department seized the companys documents and books of accounts from July 29, 2018 to February 28, 2019, due to which the resolution professional could not function during that period. The NCLT had to extend the insolvency period for 215 days in March 2019. There were other hurdles as well. The Commercial Tax Department, Bilaspur, Chhattisgarh, had by an order dated March 16, 2017 frozen three bank accounts of Era Infra. The freeze continued even after the insolvency proceedings started in May 2018. The freeze was lifted in June 2019 after the resolution professional moved the NCLT.
Meanwhile, the Enforcement Directorate attached several properties of Era Infra under the Prevention of Money Laundering Act (PMLA). The Resolution Professional moved the NCLT seeking lifting of attachment. However, the case is still pending with the NCLT and the next date of hearing is in October 2020.
Experts and lawyers feel government agencies have been creating a lot of trouble for not just Resolution Professionals, but for applicants as well.
Bishnoi of Khaitan & Co says this is happening despite the government amending the IBC law and inserting Section 32A. According to Section 32A, the liability of a corporate debtor for an offence committed under any law prior to the commencement of the insolvency proceeding will cease and the corporate debtor will not be prosecuted for such an offence from the date the resolution plan is approved by the adjudicating authority.
Tarun Gulati, a Supreme Court lawyer, says even after the approval of the resolution plan, many government authorities are finding it difficult to accept the fact that there will be no proceeding against the company. "Tax authorities are not accepting it and they keep raising demands. So these companies have to go all around the country challenging those. This is becoming a big issue. Once the resolution applicant comes in, he wants to do business. If he is plagued by earlier troubles, how he will turn around the company?" he asks.
The Bigger Problem
Apart from litigations and legal hassles, Era Infra faces commercial issues as well.
The company has received two bids - one from Suraksha ARC and another from a small-time EPC contractor. According to sources, both applicants want to bid for Era Infra and the six SPVs that it had for contracts given by government departments. The CoC is yet to approve either of the two resolution plans - the reason being lack of clarity in terms of the legality of the resolution plans submitted.
Era Infra is an EPC company, and EPC companies are fundamentally services companies that do not have assets. Typically, as an EPC company when Era gets a contract for a project, they create an SPV, and the lenders fund the SPV. Due to these inter-linkages, a large part of values are stuck in SPVs. "When we went to the market, we realised there was no interest in Era Infra as an EPC company on a standalone basis. Buyers want both the holding company as well as SPVs. Even if there was some interest from some ARCs, it was primarily to milk the arbitration claim," says a source privy to the proceedings.
Another issue delaying the resolution process is the fact that in Era Infra all the value is in disputed receivables, and all of it have gone into arbitration. Sources told Business Today that Rs 23,000 crore worth of receivables are stuck in arbitration, and it has received Rs 1,200 crore in arbitration award during the insolvency period. The CoC expects Era Infra to get Rs 11,000-12,000 crore in arbitration award.
However, the issue that the CoC now faces is whether it has the legal right to bunch SPVs with the holding company and sell it to either of the bidder. It has moved an application seeking clarity on that matter at the NCLT.
The matter was heard by the NCLT two-three times early this year, and the next date for hearing was on March 25. Unfortunately, on March 23, the NCLT closed down.
According to the sources mentioned earlier, even if the NCLT gives clarity on the issue tomorrow, it will take three-four months for the CoC to approve one of the resolution plans. Given the lack of legal clarity, the CoC has not even entered into any negotiations on the commercial aspect of the resolution plan. So, unless the CoC approves one of the resolution plans, it can't ask the NCLT for its final approval.
Sources say neither of the resolution applicants is committing any upfront payment, but both say they will fight the arbitration cases, and whatever arbitral awards the company gets would be shared with financial creditors.
Odds are against Era Infra and its resolution through the IBC mechanism. It is racing against time even as legal issues and commercial considerations continue to delay the process. Amidst all these, creditors, employees and other stakeholders will be hoping that the two resolution applicants do not withdraw their plans citing delays as was the case with Suraksha ARC in the Wind World (India) case.