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Bhadreshwar Vidyut Insolvency: NCLT Chennai Sets New Precedent in Fair Play and Bidding Rules

SD Partners

In the recent order of NCLT Chennai in Bhadreshwar Vidyut Private Limited (IA(IBC)/419(CHE)/2024 in CP(IB)/106/CHE/2021), the NCLT has emphasised on the fair play in the challenge process conducted during the corporate insolvency resolution process. This is one of the first orders where Committee of Creditors has been directed to recognise a bidder as anchor bidder in a challenge process. Let's explore the key aspects of this ruling by the National Company Law Tribunal (NCLT), Chennai.


The Case in Focus


The case revolves around the challenge process undertaken by Committee of Creditors of Bhadreshwar Vidyut Private Limited (BVPL), a power generation company. To discover price for an insolvent entity, the CoC often adopts a challenge process over direct negotiations. This approach is seen as fair and transparent, ensuring equal opportunity for all participants to place competitive bids.

 

There are several models followed in such challenge process, including a Swiss challenge method, an English auction method or hybrids of the two. For the past few years, iterative bidding models have been the first preference of the CoC and only in limited cases, have the CoC’s opted for the swiss auction process.

 

In BVPL’s case, multiple rounds of bidding were conducted to determine the highest bidder (H1) under two separate challenge processes. Both the challenge process were conducted through iterative bidding process, i.e., each participant was given the chance to improve the offer of the last round and this process continued till only one bidder is left standing. Importantly, in the second challenge process, the rules stated that the challenge process was the final opportunity given to the bidders to make their offers.

 

In both the first and second challenge processes, Jindal Power Limited emerged as the highest bidder. Despite this, the CoC decided to proceed with a third challenge process, citing the need for “value maximization” and changed the challenge process method from iterative to swiss challenge process.  Jindal Power raised objections, arguing that the decision for another challenge process was unwarranted and against the agreed rules.


Jindal Power’s Key Arguments


Jindal Power made the following key arguments:

 

(a)  The rules clearly stated that the second challenge process was the last and final opportunity to make an offer for BVPL.  These rules were decided by the CoC and it was not permitted to change these rules post completion of the challenge process.

 

(b)  Conducting a third challenge process would breach the agreed bidding terms, creating uncertainty for bidders and discouraging future participation.

 

(c)  Jindal Power were the sole participant and the highest bidder in the second challenge process. As such they have discovered the value for the company and if any further challenge process is to be conducted, they should have been considered as the anchor bidder.


NCLT’s Ruling

After considering arguments from both sides, the NCLT struck a balance between the CoC’s authority and its responsibilities:

 

(a) While recognising the CoC’s right to conduct multiple rounds of bidding for value maximisation, the Tribunal emphasised that altering bidding rules mid-process undermines transparency and fairness. 

 

(b)  It also ruled that Jindal Power should be treated as the anchor bidder for the third challenge process, granting them the right of first refusal in subsequent bids. It acknowledged that Jindal Power adhered to the second process rules and emerged as the highest bidder.


Why This Matters

 

With the Supreme Court acknowledging the "commercial wisdom" of the CoC as non-justiciable, bankruptcy courts typically refrain from interfering with the CoC's decisions. However, since the Supreme Court has not specified which decisions fall under "commercial wisdom," there has been a tendency to classify all CoC decisions as exercises of commercial wisdom, even those that may be unfair or lack transparency.


In this ruling, the NCLT has attempted to establish some guidelines for the CoC's exercise of commercial wisdom. It seeks to balance the CoC's powers with their responsibilities. While it acknowledges the CoC's discretion to adopt any process to maximise the value of the Corporate Debtor, it also stresses that the CoC must adhere to the rules they have established. The ruling implicitly recognises the concept of the "originator of bid" and the right of first offer for the bid's originator. A person who identifies value in an asset should not be unfairly treated by being placed on the same level as those who declined to participate in the bid or increase the value. Consistency and predictability in an auction or challenge process are essential to ensure investor participation.

 

What’s Next for Bhadreshwar Vidyut?

 

The tribunal has directed the CoC to proceed with the third challenge process, treating Jindal Power as the anchor bidder. This decision ensures a level playing field, safeguarding Jindal Power’s position while allowing other investors to submit competitive bids.


Disclosure: SD Partners represented Jindal Power in this matter.






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