Insolvency-Synergies-Dooray-Automotive

Facts of the Case

  1. The tribunal vide its order dated 23rd Jan 2017 admitted the petition filed by the corporate debtor seeking initiation of the Corporate Insolvency Resolution Process, under sec 10 of the IBC, to appoint Applicant herein as the Interim Resolution professional (IRP). As per section 12 of the IBC, the CIRP period ends on 21st July 2017 (180 days).
  2. The first meeting of the Committee of Creditors was called on 22nd February 2017, on which date, the Applicant herein was confirmed as the Resolution Professional (RP) of the Corporate Debtor.
  3. Applicant had duly filed the list of Committee of Creditors, which has been updated from time to time after verification, it was placed on record of this Tribunal on 30th May 2017.
  4. As per requirements of sec 25(2)(h) of the IBC, the Applicant herein initiated the process of inviting prospective Resolution Applicants for submission of Resolution Plans for the resolution of the Corporate Debtor. Based on this following entity sent Resolution Plans
  5. SMB Ashes Industries.
  6. Synergies Casting Limited.
  7. Suiyas Industries Private Limited.
  8. At the 2nd meeting of Committee of Creditors held on 24th June 2017, the resolution plans submitted by SMB Ashes Industries and Suiyas Industries Private Ltd., placed before the meeting held on 24th June 2017 was unanimously rejected by the Members of the Committee of Creditors. However, Resolution Plan submitted by Synergies Casting Ltd. (SCL) was approved by majority vote of 90.16% (EARC abstained from voting), with certain modifications (duly reflected in the minutes) and the above item was declared as approved/passed by the requisite majority by Applicant herein.

So, the instant Application is being moved for submission of Resolution Plan under section 30(6) of the IBC and for approval under Section 31(1) of the IBC.

Therefore, as per Resolution Plan there will be Amalgamation of Synergies Dooray Ltd-Corporate Debtor with Synergies Castings Ltd- Applicant. And based on the resolution plan various major reliefs/concessions are given to SDAL

Corporate Debtor: Synergies-Dooray Automotive Ltd

Applicant/Resolution Professional: Mamta Binani

Respondents

  1. Edelweiss Asset Reconstruction Company Ltd. (EARCL)
  2. Millennium Finance Ltd
  3. Synergies Casting Ltd
  4. Alchemist Asset Reconstruction Company Ltd
  5. Synergies Dooray Automotive Ltd.(SDAL)

Date of Judgement/Order: 2nd August, 2017                                  Courts: NCLT Hyderabad

Issue

EARCL had filed an objection dated 10th July 2017, stating that Millennium Finance Ltd was wrongly included in the committee of creditors and that it was a related party and the approved resolution plan is in contravention of provisions of IBC, 2016. Is this objection valid to hold grounds for rejection of the resolution plan?

Decision

  • The resolution professional has certified that the approved resolution plan is not in contravention of provisions of any law for time being in force and it has complied with all statutory provisions as mandated under section 31 and section 32 of the IBC, 2016.
  • The three Assignment Agreements commonly dated 24.11.2016, through which SCL has assigned its accrued rights to MFL, which is alleged to be a related party issue etc., it is stated that those issues have already raised by EARCL by filing C.A.No.43/2017, C.A.No.56/2017. C.A.No.57/2017 and C.A.No.124/2017. And all the contentions raised by EARCL are already considered by the Adjudicating Authority and passed separate orders dated 02.08.2017 by rejecting all those contentions as not meritorious.
  • SCL has 9.18% share in the total outstanding debt of SDAL. To that extent, the cash outflow will be reduced post-merger. SCL is to receive substantial sum of monies from MFL, which is the largest financial creditor of the SDAL (Corporate Debtor) amounting for around 69.32% of the total outstanding debt of SDAL. And one of the conditions of the approved resolution plan is that MFL has to first make necessary payments to SCL and SCL can make appropriate payments to MFL in order to establish the bonafide of both the parties/genuinely of the transactions.
  • After going through the facts of the case in detail NCLT directed EARCL to extend full cooperation to carry out the terms and conditions of the said resolution plan and also mandating the SCL and SDAL to involve EARCL in the affairs of Company, in accordance with law.

Table 1: Debt details (Pending & Waived Off as on March 2017) (All Figures in Rs. Crores)

Particulars Payment to be done as per resolution plan Amount of Claim Amount to be paid Amount waived off
Payment to EARC 4.89 86.92 6% 94%
Payment to AARC 6.87 122.06 6% 94%
Payment to MFL 37.92 673.91 6% 94%
Synergies Casting Ltd 0 89.26 0% 100%
Total 49.68 972.15 5% 95%

Table 2: Comparable figures are of FY 2015 (before SCL taking over the secured debt of SDAL) (All Fig. in Rs. Lakh)

Particulars Synergies Dooray Automotive Ltd. (SDAL) Synergies Casting Ltd. (SCL) Post-merger Combined figures
Liabilities
Share capital 1,958.77 2,854.97 4,813.74
Reserves and Surplus -36,010.91 13,001.50 -23,009.41
Share application money pending allotment 29.76 29.76
Sub Total A -18,165.91
Non-current liabilities
Secured 35,970.38 1,158.28 37,128.66
Unsecured 0.37 932.96 933.33
Deferred sales tax loan 351.68 270.42 622.10
Deferred tax liabilities 16.76 16.76
Long-term provisions 165.79 165.79
Sub Total B 36,322.43 2,544.21 38,866.64
Current liabilities Total C 63.24 11,058.53 11,121.77
Total A+B+C 31,822.50
Assets
Non-current assets 1,989.75 10,546.03 12,535.78
Current assets 373.54 18,913.18 19,286.72
Total Assets 31,822.50

This is the first resolution plan in which Resolution Professional has successfully convinced the creditors to agree on 5% of the total repayment, in other words the creditors are agreeing to waive off 95% of the total debt owed to the company and has put all the objections of EARC to rest. Also, we can draw an attention to one point that the creditors have not converted their loan into equity shares as they are not interested in the management of the company.  Moreover, based on Debt Rehabilitation Scheme which had filed by SDAL with BIFR to facilitate the amalgamation of SDAL into SCL. SCL had acquired 91% of the secured debt of SDAL which is Rs 327.33 Crores.

Following are some of the major reliefs provided to SDAL under the resolution plan:

  1. The State Government of Andhra Pradesh has exempted the merged entity i.e. SDAL from levy of Stamp Duty on the value of assets transferred on account of merger of SDAL with SCL.
  2. Sales Tax-Department will accept the re-payment of outstanding of Rs 351.69 Lakhs towards Sales Tax Deferred Payments and the Service Tax Department will accept Rs 37.84 Lakhs towards Service tax dues (to the extent remaining unpaid) in three equal annual installments starting from FY 21, 22, 23 without any interest, damages, penal interest etc. And the respective departments will also waive penal interest, simple interest, compound interest, damages charged if any on the liability of the company as on the date of approval of the Resolution Plan.
  3. Exemption to SCL from the applicable provisions of Sec 79 and entitlement to carry forward losses and unabsorbed depreciation as per the provisions of Sec 72A of the Income Tax Act, 1961.
  4. Prepay the dues of Banks/Financial Institution/Creditors, without any additional levies.
  5. SCL will bring in funds in the form of equity/interest free unsecured loans to finances any shortfall in each generation to meet the repayment obligations and to finance any other financial obligation which may be required for the implementation of the Resolution Plan.
  6. The promoters, directors would continue to extend their personal guarantees to lenders till the entire repayment of the debt, in the manner as envisaged in the scheme.
  7. The balance sheet of the company as on the cut-off date shall stand restructured in terms of the scheme and as per Annexure of the Financial Projections attached.

As per article published on 31st August 2017. The summary of the debt is as follows:

Original Creditor Amount (Rs in Crores)* Subsequent Creditor Final Creditor
IDBI 74.57 Synergies Castings Millennium
ICICI 66.30 Asset Reconstruction Company (India)/Synergies Castings Millennium
EXIM Bank of India 18.36 Edelweiss
State Bank of India 25.28 Synergies Castings Millennium
Indian Overseas Bank 9.89 Synergies Castings Synergies Castings
Andhra Bank 8.35 Synergies Castings Synergies Castings
HSBC 9.52 JPMorgan Chase Alchemist
Total 212.27

Source: NCLT Docs; *Amounts are as of March 2007.

Conclusion

  • The creditors have agreed to take home 5% of the total debt that they owe to SDAL, whereas the reliefs given by the Government show that the Government is accepting 100% payment of their dues in 3 equal annual installments after the entire creditors’ dues are paid out.it seems in the resolution plan, time value of money is not getting properly captured. Apparently government gets favorable treatment but it has major risks of not getting anything if the corporate debtor after first or second year does not have enough funds to make subsequent payment. So, in as the government dues falls after the creditors due as per Sec 53 of the Insolvency Act, but the Resolution professional can suggest and NCLT accepts the proposal for waiver of dues to the government in the same proportion as to other secured creditors.
  • The Resolution Plan has not given any road map to ensure the going concern status of the company how will the same be justified?
  • And as per the Resolution Plan, SCL will bring in finance through receivables from other corporate debtors amounting to Rs 25.48 Crores and Internal Accruals from operations Rs 28.60 Crores. How will the Resolution plan be financed from the receivables, whether and when there will be inflow of money from receivables?

The above table enlightens on the facts of the case of Synergies Dooray Ltd and Synergies Casting Ltd here is that for the lenders to be accepting such generous payment there should be a Good Co which can be used to buy out as many as possible of the original creditors of the overstretched Bad Co at a discount. Transfer those obligations to a financing firm for free, and declare bankruptcy for the dying company.

Though this resolution plan got accepted on one of the grounds that if Dooray had gone into liquidation, 1,500 jobs at the aluminum alloy-wheel maker would have been lost and creditors would have received Rs 7 crores — or less than 1 percent of the original claim. So, a 6 percent recovery rate isn’t the worst outcome, but it’s definitely sub-optimal, if all the companies undergoing insolvency proceedings undertake this strategy, then the entire purpose of insolvency law stands defeated.

Stressed companies under insolvency proceedings which have a buyer will buyout the lenders and endorse the debt to a single lender for a majority share of 75% to dominate the voting decisions in Committee of Creditors, this particular single lender will take decisions in the favour of the promoters of the corporate debtors. Thereby having a no-win situation for banks.

Main Contributor for the Article : Anuja Awasare (@Anu_1411)

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