In a relief for the Torrent Group in the Reliance Capital IBC case, the National Company Law Tribunal (NCLT) on Thursday ruled that the extended challenge mechanism proposed by the financial services company’s lenders was not in compliance with IBC regulations.

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The NCLT bench concluded that the challenge process concluded on December 22, 2022 with the declaration of highest net present value (NPV) of Rs 8,640 crore offered by Torrent. The tribunal declared that the process note for the second challenge mechanism was in violation of Regulation 39(1)(A)of the Corporate Insolvency Resolution Process (CIRP) regulations.

It rejected the argument that Torrent has not complied with its NPV financial proposal of Rs 8,640 crore, and said that a proposed second round of the challenge mechanism was a deviation from the regulations.

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The NCLT emphasised that there are some circumstances under which Committee of Creditors (CoC) may exercise its commercial wisdom under the Insolvency and Bankruptcy Code (IBC). However, the CoC cannot exercise commercial wisdom that is beyond the procedural framework provided under the Code.

After the statutory scheme of challenge procedure is complete, the CoC is not permitted to devise an unlawful method of evading the code's provisions in order to thereafter engage in negotiations with resolution applicants, it said.

The proposed second round of the challenge mechanism was seen as an attempt to indirectly achieve what could not be achieved by adhering to the challenge mechanism, it added.

Sources have told CNBC-TV18 that RCap lenders are likely to challenge the NCLT order.

Thursday’s ruling comes on after Torrent moved NCLT opposing the revision in bid by Hinduja post e-auction and sought to stay the on extended challenge mechanism proposed by RCap’s Committee of Creditors (CoC). It protested saying it was already declared the highest bidder in the Dec 2022 auction.

Lenders, however, argued NCLT must not interdict CIRP proceedings by asking CoC to accept or reject plans.

Lenders had argued litigation and delay led to Rs 135 crore loss (in three weeks) of mostly public money. They said that if the bid values were frozen at Dec 2022 levels, it will risk an order for liquidation and that CoC is not in a position to accept sub-optimal plans when higher value is clearly to be had.

During the NCLT hearing through January, Mukul Rohatgi representing Torrent noted that the firm was declared the highest bidder after the December 21 auction with an Rs 8640 crore offer and the process of value maximisation ended with the auction.

Therefore, the law does not permit holding of a second round of auction after the challenger mechanism concludes, he pointed out. He argued that the Reliance Capital Admin and CoC were disguising the second auction as an “extended challenge” as there is no provision for another challenge.

Kapil Sibal, appearing for RCap Committee of Creditors, had alleged that Torrent's claim that its bid was compliant and has to be considered is factually incorrect as it was below the threshold. RCap Admin wrote to Torrent on January 4 saying there was a difference in financial proposal and bid and that it was non-compliant in the third round of bidding of the challenge mechanism.

The lawyer claimed IIHL later made a bid of Rs 9000 crore and Torrent wants RCap to consider a lower offer. He had argued that the original Request for Resolution Plan (RFRP) note says Admin with prior approval of CoC reserves the right to change modalities of challenge mechanism or revise the challenge mechanism.

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First Published:Feb 2, 2023 3:37 PM IST