With Orchid Pharma Case, Supreme Court Removes an Important Roadblock in the IBC Process

Creditors don't have to automatically opt for liquidation, even if its higher than the bid value offered.

Chennai: In what is considered a significant ruling that clears a major roadblock for corporate insolvency resolution cases under the Insolvency and Bankruptcy Code (IBC), the Supreme Court has asserted that there is nothing in the law to suggest that the ‘resolution’ or ‘bid’ value should not be less than the liquidation value.

The apex court gave this ruling in the insolvency case related to Chennai-based Orchid Pharma (formerly Orchid Chemicals and Pharmaceuticals Ltd).

The Supreme Court ruling will come as a huge boon for the corporate insolvency resolution exercise since the entire process gets mired in numerous interpretations of the stipulations.

“As a matter of law, this judgment has to be set aside in view of our recent judgment dated January 22, 2020 in Civil Appeal No. 4242 of 2019 entitled Maharashtra Seamless Limited vs. Padmanabhan Venkatesh & Ors,’’ the apex court said.

“No provision in the Code or Regulations has been brought to our notice under which the bid of any Resolution Applicant has to match liquidation value arrived at in the manner provided in Clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. This point has been dealt with in the case of Essar Steel (supra). We have quoted about the relevant passages from this judgment,” the Supreme Court quoted its own earlier ruling to set aside the judgement of National Company Law Appellate Tribunal (NCLAT).

The Supreme Court ruling in the Orchid Insolvency case assumes considerable significance for the very efficacy of the IBC. At least, it has clarified an important roadblock that threatened to put the whole resolution exercise into peril.

In a way, it has also come as some sort of clarification. The Supreme Court order in this instance has placed its faith on the commercial wisdom of a committee of creditors in arriving at the resolution value in any insolvency proceedings.

Also Read: How Do We Ensure India’s Insolvency and Bankruptcy Code Keeps Working Well?

Orchid Pharma was among the 28 large corporate defaulters in the Reserve Bank of India’s second list of debt-laden companies that was referred for insolvency in August 2017.

The order for initiating the corporate insolvency process was passed against the company by the Chennai bench of NCLT on August 17, 2017. Ingen Capital, a US-based firm, came out as the highest bidder at Rs 1,490 crore. The resolution plan, however, was squashed as Ingen Capital failed to make payment as per the provisions.

This resulted in the second round corporate insolvency resolution process. This saw three companies in the race for Orchid They were: Dhanuka Laboratories (Gurgaon-based), Accord Life Spec (Chennai-based) and Covalent Laboratories (Hyderabad-based). The CoC voted in favour of Dhanuka.

After the approval of the resolution plan submitted by Dhanuka Laboratories, an appeal was preferred by Accord Life Spec. The NCLAT accepted the appeal on November 13, 2019, and rejected the bid of Dhanuka Laboratories on account of it being lower than the liquidation value.

The total debt of Orchid stood at Rs 3,200 crore. Dhanuka’s offer was to the tune of Rs 1,116 crore. But the liquidation value was placed at Rs 1,309 crore. The Supreme Court, in its order dated December 6, 2019, provided for an interim stay on NCLAT scrapping of Dhanuka’s resolution plan. The interim order came after an appeal was filed by SBI, contending that the Appellate Tribunal erred while overriding the commercial wisdom of CoC.

Now that the apex court has ruled that resolution value need not match the liquidation value, the corporate insolvency resolution exercise will pick up fresh momentum. This should come as a big relief for financial creditors who could now hope to salvage some money out of a gone case.

K.T. Jagannathan is a senior business journalist.