(a) If a corporate debtor is in financial difficulty, is there an attitude of 'concealment' or 'denial' toward the admission or exposure of that financial difficulty?

 

Yes, there is an element of concealment under such circumstances. The attitude of 'denial' towards the admission or exposure of the financial difficulty in extremely common in India. Since a disputed debt, is not considered a sufficient ground to wind up a Company, most Corporate Debtors dispute the debt due when a winding up or insolvency action is commenced.

According to Section 15 of the sick Industrial Companies (Special Provisions Act, 1985), where an industrial company has become a sick industrial company, the Board of Directors of the Company, shall, within 60 days from the date of finalization of the duly audited accounts of the Company for the financial year or at the end of which the company make to the Board for determination of the measures which shall be adopted with respect to the company clause (2) says that the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a Scheduled Bank may, if it has sufficient reasons to believe that any industrial company has become risk (which may be due to heavy debt, among other debtors), make a reference in respect of such company to the Board of determination of the measures which may be adopted with respect to such company. Section 23 of the same Act describes the proceedings in case of potentially sick industrial companies, misfeasance proceedings, Appeals and miscellaneous. The criteria here is erosion of 50% or more of the Companies peek or the highest net worth during the from financial years immediately proceeding the year in which accumulated losses of the company have exceeded the said networth.

(b) If so, is the reason for this based on cultural or other factors?

(c) Is it likely that a corporate debtor would:

(i) volunteer the fact of its financial difficulty to a lender or group of lenders; or

(ii) admit or concede it only if and when confronted by a lender or group of lenders?

(d) If a corporate debtor is in financial difficulty, is it likely that the corporate debtor would:

(i) do nothing;

(ii) seek expert assistance and advice; or

(iii) accept the appointment by a lender of an outside expert/advisor?

(e) If it was agreed between a lender and a corporate debtor that an expert/advisor would be appointed, is it likely that a corporate debtor would give the expert/advisor unrestricted access to all relevant financial and other information regarding the corporate debtor?

(f) In that situation, is it likely that the financial and other information regarding the corporate borrower would be:

(i) complete; and

(ii) accurate (particularly regarding the valuation of assets and the assessment of liabilities)?

If a corporate debtor is in difficulty it is likely that the corporate debtor would approach the senior Lenders for some rehabilitation, waiver of compound or penal interest, funding of the interest dues on a zero coupon rate or atconcessional terms. It would prepare a scheme of arrangement or rehabilitation plan with the assistance of experts or an advisor which it would submit to the senior Lenders.

RBI has police guidelines for revival of sick industrial companies and the role to be played by lead institutions or Operating Agencies appointed by the SICA for reviving industries declared to be sick under SICA.When a Lender appoints an outside expert, the court of the Board for Industrial & Financial Reconstruction ("BIFR") would normally have to intervene to render help to such expert or advisor to collect information on an unrestricted basis. Depending upon the extent of the industrial sickness and the accumulated arrears or losses, it is likely that the records of the company would be in disarray in such circumstances reconstruction of accounts on the basis of actual transactions is laborious and difficult to achieve. Large accounting firms render costly services and Lenders are wary of appointing high cost expensive services in a rehabilitation scheme. Usually the Lenders, if they are public financial institutions rely upon their own in-house expertise and staffing to ferret information.

Under the provisions of Section 18 several measures have been prescribed for revival of a company. Even in the case of non-scheduled industries, not governed by Schedule I of the Industries Development and Regulation Act and consequently under the SICA; the provisions of Section 391 & 394 of the Companies Act for proposing a scheme of rehabilitation is normally recoursed.

(a) Is it more common that the financial difficulty of a corporate borrower will be:

(i) volunteered by a corporate debtor; or

(ii) discovered by a lender (and, if so, how)?

(b) If a lender becomes aware that a corporate debtor is in financial difficulty, is it likely that the lender would seek to investigate the financial crisis of the corporate debtor itself and employ an expert/advisor to investigate the financial position?

(c) If so, is the expert/advisor likely to be:

(i) an independent professional; or

(ii) an 'in-house' employee of the lender?

(d) Is it likely that information regarding the financial position of a corporate borrower as discovered from the work of an expert/advisor would be:

(i) kept secret from other lender/s or creditors;

(ii) disclosed to other/selected lenders?

(e) If there were 2 or more lenders (not in a syndicate) involved with the same corporate borrower, is it likely that they would:

(i) join together to share information and endeavour to work out a common approach to the financial problems of the corporate borrower; or

(ii) act secretly and independently of one another?

(f) If there was a group of lenders (whether in a syndicate or not) involved with the same corporate borrower, is it likely that one of them would offer or seek to be the leader on behalf of them all?

(g) If so, is it likely that such a proposal would be agreed to by the other lenders?

 

Lenders, for reporting requirements as financial covenants on the basis of which they can compel a corporate debtor to furnish information on a monthly, bimonthly, quarterly or six monthly basis. When the reporting is not done regularly the lenders discover the reasons for default by sending an inspection team. Good corporates who have responsible norms on corporate governance do volunteer the causes of their financial difficulty.

Major corporates would seek to invite the lenders to examine the reasons for the financial crises and also appoint experts to investigate these reasons. Only in the case where the corporate lender does not appoint independent advisors or prevents access by the Lenders would the Lenders seek directions from either a court or the BIFR for appointing investigators to look into the financial crises.

Due to high costs involved in appointing independent professionals the Lenders normally engage their own salaried employees to visit the borrower and ascertain these causes. Major financial institutions and banks have separate divisions dealing with industrial sickness or recovery actions. These officers are nominated to investigate. Very rarely and in exceptionally large borrowings independent auditors or industrial experts are requested to go into the affairs of the company.

Confidentiality agreements would be required to be executed by independent experts if they are to go into the company's working. Usually large borrowings are done on a consortium basis and the covenants for reporting are commonly shared. It is, therefore, difficult to keep a financial report secret from other lenders who are members of a consortium. The report would be normally shared and debated among the lenders. There would be a sharing arrangement to share the costs for appointment of an investigator and a common working programme would be adopted to finalise a rehabilitation scheme. These schemes are working under the directions of the managing or governing body of the Lenders and decisions are usually taken independently of one another but with a common intent to rehabilitate the company if it is financially viable. Normally at the time of commencement of the lending one of the lenders, would be nominated as the senior lender or monitoring bank. If unrelated lenders have lent monies to the corporate, directions from the court or the BIFR would be required to nominate one of them to be the leader on behalf of all of them. This appointment would be at times be contested in legal proceedings among the Lenders when there is no agency agreed at inception, local major lenders who have sufficient experience in working out settlements.

When a foreign bank is involved, the consortium would normally include even these foreign banks and the domestic lenders would work in combination with the foreign banks. They would take the advise and response of the foreign lenders and try to work out a satisfactory solution in consultation with the foreign lenders. The influence of the foreign lenders will, however, depend upon the extent of the liability of the corporate borrower to the foreign lenders.

There is no market for trading of a junior or minor lenders debt in insolvent circumstances and banks do not increase their exposure when industrial sickness is experienced by them. It is, however, quite likely that the new sponsors or substitute promoters, may buy out the minor debtors or lenders at a discount.

The scheme of rehabilitation may enable a change of sponsors, a compulsory sale of equity holding and change in management due to the sickness having been caused by the promoters. This action of changing the equity ownership or augmenting the equity ownership so as to dilute controls of existing sponsors, mergers, demergers and several actions can be approved by a court or the BIFR based upon recommendations given by the Operating Agency or lead financial bank. Lenders, therefore, do get some reliefs and can prevent the perpetuation of industrial sickness directly relatable to the poor management skills of existing promoters.