Insolvency Case Study – Alok

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Sanjay Dongre
| Corporate Law - Articles
12 Aug 2018
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On 26th Feb 2016, Alok Industries communicated to the Stock Exchange, informing
them about the Extra Ordinary General Meeting of the Company to be held on 14th
March. Among other things the special agenda had items that affected its creditors.

On 8th March 2016, HSBC Ltd acting as agents of Industrial and Commercial Bank of
China, one of the creditor, filed a Winding Up Petition (194/2016) against Alok
Industries Ltd in the Bombay High Court u/s 433 (e) of the CA Act 56,

“Circumstances under which company may be wound up by Court; a Company may

be wound up by the Court under sub section (e), if the Company is unable to pay its
debts.”

On 14th March 2016, Alok Industries in its EOGM, passed the resolution to approve
invocation of SDR, that had been agreed with the Joint Lender’s Forum.

The Strategic Debt Restructuring was a new tool introduced in 2015, by the Reserve
Bank of India that took a strategically different approach at NPA Resolution by giving
the banks a right to convert the debt into equity and thereby gain management control
of the Company, which can be used to either restructure the company or change the
management. SDR was structured on the basic assumption that bankers possess
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strategic skills to restructure a business.

Accordingly, a portion of the total debt outstanding of 2,557 cr was to be converted into
255 cr equity shares at face value thereby giving the Lender’s a minimum 51% equity
stake in the company. The SDR was invoked after the Company’s account had slipped
into SMA 2 grade with most banks, but a major chunk of the SDR equity would go to
SBI and its associates.

In total there were 32 allottees through SDR, almost every SCB in India, but not ICBC.
It rightfully approached the High Court on 8th March to protect its interests.

Immediately after the 14th March EGM, an article appeared in Economic Times, on 16th
March, 2016.

“Bulge-bracket private equity funds TPG Capital Management and KKR & Co LP are
competing with domestic textile companies Vardhman Group, Trident and a brand
new special situations JV between Ajay Piramal Group and Brescon to take control of
debt-ridden Alok Industries, one of India’s largest exporters of home textiles.“

On 27th April, State Bank of India filed an Interlocutory Application (353 of 2016) in
the Bombay High Court in the matter pertaining to 194/2016. It prayed for permission
to implement the EOGM Resolution of Alok Industries and to keep the Winding Up
petition in abeyance.

The article in Economic Times continued,

“SBI Capital Markets has since been mandated to run a formal auction process to sell
the core businesses as a whole or in parts,”

Soon thereafter in a turn of events, SBI sought to withdraw its IA, which was duly
granted by the Hon’ble HC on 3rd May 2017. New developments had taken place on
Mint Street.

About a month later, the Internal Advisory Committee (IAC) an RBI Panel comprising
of the independent members of RBI Board held its first meeting on 12th June 2017. The
IAC agreed to focus on large stressed accounts at this stage and accordingly took up for
consideration the accounts which were classified partly or wholly as non-performing
from among the top 500 exposures in the banking system.

The IAC recommended for Insolvency and Bankruptcy Code reference all accounts with
fund and non-fund based outstanding amounts of over Rs 5,000 cr with 60% or more
classified as non-performing by banks as on March end 2016.

On this objective criteria, the twelve major defaulters, or the Dirty Dozen were
identified, that cumulatively aggregated to over twenty five percent of the GNPAs in the
banking system.

A week later on 19th June, 2017, lenders met to formulate a joint plan to initiate action
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against the Dirty Dozen in terms of filing CIRP with NCLT. Simultaneously another
meeting in the PMO, conducted by Prime Minister’s additional secretary PK Mishra, in
which senior officials of the Ministry of Finance and Ministry of Corporate Affairs
participated, took stock of the NPA issue.

Clear instructions, without which bankers rarely work for the usual inbuilt fear of
vigilance, were issued to initiate CIRP proceedings in the case of the Dozen, viz.
Bhushan Steel Ltd, Bhushan Power, Essar Steel, Jaypee Infratech Ltd, Lanco Infratech,
Monnet Ispat, Jyoti Structures, Electrosteels, Amtek Auto, Era Infra Engineering Ltd,
ABG Shipyard Ltd and Alok Industries Ltd.

So on 29th June 2017, in another turnaround by SBI, it filed a CIRP application No.
48/2016, u/s 7 of the CODE. Now it was the turn of HSBC to file an IA, which it duly did
(IA – 188/2017) on 17th Jul 2017. While the HSBC winding up petition in Bombay HC
was listed for admission on 19th July, the NCLT Mumbai heard the IA petition of HSBC
on 18th Jul, 2017.

It would be a decisive hearing that could provide clarity on the litigation jurisdiction
demarcations in corporate matters.

Things had turned bad to worse for Alok Textiles. It was just five years before, on
August 26th 2012, that in a glitzy ceremony in Mumbai, Brett Lee, the famous
Australian cricketer popular in India had launched his line of branded active wear (tees,
track pants, Capri, shorts etc) in India, in association with H&A.

H&A was selected probably for the fact that it had a network of 204 exclusive business
outlets and 173 Shop In Shop presence. From the megapolis to small towns like Latur,
the outlets were everywhere, either direct Company owned or through the franchise
model. The value format store merchandised a range of products from apparels, bed
sheets, towels and accessories like shoes and bags for the entire family. The stores
offered good quality product at affordable prices. Most of these products were
manufactured by Alok Textiles Limited.

The retail thrust had been initiated by the Company as a forward integration strategy, to
leverage on its textile manufacturing expertise. The retail operations were put together
in a subsidiary, Alok H&A Ltd and Alok Retail India Ltd.

It was on the back of a foray into the UK market with ‘Store Twenty One’, where it had
put up 221 stores. The chain offers a value proposition for quality apparel for women,
men and children. They also sell accessories like artificial jewellery, shoes, leather bags
and toys, which complement the apparel range.

Within a year since that promising association with Brett Lee, the Company had started
rolling back its plans. The high rental cost and less than expected oftake had hit the
business. By March end 2012 the retail presence had dwindled to 291 from a peak of 350
in Dec’11. Within two years since that glitzy ceremony, the Company had exited the
retail domestic business as part of a changed strategy to focus on the core textiles
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business and exit all non-core business domains.

Not just that it had given out mandates to leading investment banks for selling the
99.87% stake it held in Grabal Alok (UK) Ltd, the company that operated “Store Twenty
One Chain”.

The UK subsidiary was bleeding (loss of Rs 7.8 cr on a turnover of Rs 402 for FY17) and
hence it was decided to do some restructuring by way of Creditors Voluntary
Arrangement (CVA) to close down loss making store and revive the business. The
number of operating stores accordingly reduced to about 135 stores (from about 220
stores) by March end 2017.

The story of Alok however pre-dates Bret Lee and begins somewhere in 1986 when the
three Jiwrajka brothers promoted Alok Industries Ltd, as a private limited company.
The first polyester texturising plant was set up in 1989.

In 1993, they went public and over the years expanded into weaving, knitting,
processing, home textiles and garments. Then to ensure quality and cost efficiencies
integrated backward into cotton spinning and manufacturing partially oriented yarn
through the continuous polymerisation route.

By 2011, when the company had completed 25 years of successful journey, the turnover
crossed 6,000 cr mark with exports accounting for over Rs 2,000 cr. Not just that they
made a net of 404 cr. The balance sheet was also strong with a tangible networth of
3,097 cr.

The early signs although were visible, as the Company was highly leveraged,
consistently for the past few years. The total debt of 9,819 cr overshadowed the tangible
Net Worth of 3,097 cr. Not just that the interest expense of 737 cr eroded bulk of the
operating profit of 1879 cr.

However, that year saw good news on too many fronts that these early warning signs
were drowned. The Company won the IMC-Ramnarain Bajaj National Quality
Performance Excellence Trophy in the Manufacturing Category and was also awarded
the status of “Star Trading House.” The good things would keep the momentum going.

In the next two years, the Company was literally on a roll, inspite of the H&A
misadventure. The Company extended its accounting year to end on 30.09.2013, so as
to facilitate the consolidation exercise by which all the non-core businesses were put
under one subsidiary #Alok Infrastructure Ltd.

This 18 month period was the best in the lifespan of the company. It conquered new
peaks. The numbers were huge, over INR 19,000 cr in Net sales, of which Exports was
over 6,000 cr, with an operating profit of more than 5,000 cr and net of over 900 cr.
The Board rightfully declared Alok Industries as the largest textile company in the
country.

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With an equity infusion of 551 cr through rights issue in April 13, the tangible networth
too crossed the 5000 cr mark. The leveraging also accelerated. Total Debt touched
16,000 cr.

Between 2004 and 2013, the company undertook large-scale expansion and spent more
than Rs 10,000 crore on building up its spinning, weaving, processing & garmenting
units. Most of this was funded through debt. The risks were on the horizon.

KH Gopal, Executive Director in charge of Risk, Governance and HR, was quoted in the
Annual Report, (FY13),

“We will place increasingly greater reliance on Enterprise Risk Management

techniques while imbibing core corporate governance practices for maximizing value
creation. Risk management will be a central part of our strategic management.”

Risk Management was put to test soon enough.

By Mar’15, the operating margins had crashed and the PAT fell to Rs 348 cr as the
global environment changed. Capacity utilization levels dipped to 30-35% levels, which
led to margin shrinkage.

Debt levels had risen and so had the average interest cost from about 7% in FY10 to
around 13% in FY14. Interest outflow touched a record 3,251 cr against an operating
profit of 5,270 cr in FY15.

A combination of factors meant that the company’s leveraging gamble did not pay off.
Some of this may have had to do with domestic and global market conditions but the
company made its share of mistakes as well.

Its’ domestic retail plans failed to take-off and the share of exports slipped as the
company could not maintain market share amidst global competition. To add to this,
the company’s unrelated diversification into sectors like real estate weakened its
finances further, eventually pushing the company into insolvency.

In 2007, the company had entered the real-estate business by acquiring commercial
property in Lower Parel, Mumbai though its real estate subsidiary – Alok Infrastructure
Ltd. This locked up large amounts of capital.

However, depressed market conditions in real estate space, restricted the company’s
ability to exit this space. It was stuck in some premium properties in South and Central
Mumbai, like Peninsula Business Park.

By FY17, the Company was in deep trouble, as net sales slumped to Rs 8,326 cr with
operating losses of 1,839 cr and net loss of 3,502 cr. The interest cost itself was
whopping Rs 3,273 cr. The Company defaulted on almost all its loan accounts with
almost every SCB in the country. The end game had begun. The Bankers now came with
the Undertaker. SBI was the ringleader.

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On 29th June 2017, as we noted earlier, State Bank of India filed a CIRP application No.
48/2016, u/s 7 in Ahmedabad NCLT.

On 18th July when the NCLT was in session to decide on the IA filed by ICBC, in the
CIRP petition, it had important issues to address. The Bench accepted the locus standi
and right of ICBC to file an IA, being a creditor of the Corporate Debtor and so an
affected party in the CIRP application.

The Bench also considered the objection by ICBC that it had not been notified by SBI
while filing the CIRP. The Bench also considered whether SBI can file a CIRP u/s 7
while a Winding Up petition was pending in the High Court. The Bench also considered
the possibility of conflicting orders being issued by the two judicial authorities’ viz. itself
and the HC.

The NCLT Ahmedabad Bench, on that day, (18th Jul 2017) relied on a NCLAT
judgement passed on 19th May 2017.

“the pendency of winding up petition cannot be a bar under the Code for initiating
CIRP, unless the winding up order has been passed by the Hon’ble HC and Liquidator
has been appointed,”

so had ordered NCLT Chennai in CA/1/IB/2017, on 21.04.2017.

The Chennai High Court, which was involved, overruled the NCLT Chennai order. The
matter then came up at NCLAT, which issued an order on 19th May, 2017,

“it is a fact that the Hon’ble HC of Madras had stayed the order of NCLT Chennai
Bench passed in CA/1/IB/2017 of 21.04.17. However, the provisions of the IBC will
prevail over all other laws in force including the CA 56.”

NCLT Ahmedabad bench relied on this order of NCLAT.

Accordingly on 18th July, 2017 NCLT Ahmedabad bench dismissed the IA filed by ICBC
and admitted the CIRP filed by SBI. It also approved the appointment of Ajay Joshi
(IBBI R/No. IBBI/IPA-003/IP-N00019/2016-2017/10166) as Interim Resolution
Professional u/s 13 (1) ( c ).

Insolvency process commenced on 18th July 2017 and the 180 day timeline was set to
end on 14th Jan 2018.

Accordingly the Committee of Creditors was formed, of which ICBC, being one of the
creditor, also was part of. In its first meeting, (accomplished within T+30) on 16th Aug
2017, the CoC confirmed Ajay Joshi to continue as the resolution professional, as per
Section 22 (2) of the Code,

An immediate fallout was that the AGM scheduled on 12th Sep was postponed to 29th
Sep, as Ajay Joshi sought more time to review the accounts.

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The Board comprising of Surinder Kumar Bhoan (Chairman Independent), Promoters
Ashok Jiwrajka (ED), Dilip #Jiwrajka (MD) and Surendra Jiwrajka (JMD) alongwith
nominee directors from IFCI, SBI, LIC and IDBI Bank, Keshav Hodavadekar (Ind Dir
had retired from IDBI Bank as CGM), Thankom Mathew (Ind Dir, retd from LIC as ED)
and the two Executive Directors, Senthil Kumar and Tulsi Tejwani, were unfazed as
business continued.

The Annual Report for FY17 issued just after the CIRP was filed, inspired confidence.

“The special package for the textile and apparel sector released by the Government
last year is a strategic decision that would strengthen the Indian textile and apparel
sector by improving its cost competitiveness in the global market…Over the medium
run, the implementation of the Goods and Services Tax (GST), follow-up to
demonetization, effective implementation of the special package and enacting other
structural reforms is expected to take the economy towards its true potential and
make business environment more conducive for the industry.”

The Chairman in his message to the shareholders did not delve much on the debt
resolution process.

“Overall Alok’s position in terms of its operational capabilities are good technically
and sustainable for each of the divisions and capable of growing once the debt
resolution is achieved.”

The implications of a CIRP ending in Liquidation had not yet sunk. The Notice for the
30th AGM to be held on 29th Sep 2017, at Silvassa, also informed the members,

“pursuant to Section 17 of the Code, the powers of the Board of Directors of the
Company stand suspended as on the CIR Commencement Date and are vested with
Mr. Ajay Joshi, who was appointed as the Interim Resolution Professional of the
Company in terms of the Order”

A day before the AGM, i.e. on 28th Sep 2017, an advertisement was released in
Economic Times, by Ajay Joshi, for EOI, requesting prospective investors i.e. potential
resolution applicants to submit their bids. The last date for submission of EOI was
marked as Oct 12th 2017, i.e. the 86th day from commencement, well within the
prescribed timeline of T+90. The process appeared to be progressing smoothly.

However a week before the process end date of 14th Jan 2018, that is on 8th Jan 2018,
NCLT approved extension of CIRP timeline from 180 days to 270 days. Now the end
date would April 14th 2018,

A day before the Closing Date, that is on 13th April, the CoC met to deliberate on the
Resolution Plan submitted by JM Financial ARC and #Reliance Industries on April
12th 2018. Things were really left to the last minute and desperate attempts were being
made to avoid liquidation, u/s 33 (1) (a),

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“where the Adjudicating Authority

(a) before the the expiry of the insolvency resolution process period or the maximum
period permitted for completion of the corporate insolvency resolution process under
section 12 or the fast track corporate insolvency resolution process under section 56,
as the case may be, does not receive a resolution plan under sub-section (6) of section
30;

It shall

(i) pass an order requiring the corporate debtor to be liquidated in the manner as laid
down in this Chapter;”

It was the unmythical Damocles sword. The stringent timelines and equally crystal clear
provisions must have weighed on the Committee as it met to consider the sole
Resolution Plan on the table.

The plan, submitted by JM Financial Asset Reconstruction Co. Ltd. and Reliance
Industries Ltd., had offered Rs 5,000 crore against close to Rs 30,000 crore in dues to
creditors.

The Plan was put to vote. It got 70 percent support. As per the prevailing provisions it
was rejected. Next day the clock stopped clicking.

On April 14th 2018, the CIRP timeline expired. The RP had not received approval of the
COC for any Resolution Plan. On 15th he informed the same to the Stock Exchanges as
required by the Listing Obligations and Disclosure Requirements. On April 16th 2018,
the RP moved an application for liquidation with the NCLT.

It was curtains down for Alok Industries.

Sometime back, on 16th November 2017, the Ministry of Corporate Affairs had
constituted the #Insolvency Law Committee under the Chairmanship of Shri Srinivas,
Secretary of MCA. Besides many other luminaries, the Committee consisted of Shri
Sahoo the Chairperson of IBBI. It was constituted with the mandate of making
recommendations on issues arising from the functioning and implementation of the
Code and issues that may impact the efficiency of the Corporate Insolvency Resolution
and Liquidation framework.

It had been a year since the Code had come into force and the wise men wisely thought
of doing a review.

“The Committee also noted that globally, bankruptcy laws prescribe different voting
thresholds for decisions of the CoC. In USA, approval of a plan requires 66 percent or
more voting share in value and 50 percent or more voting share in number for each
class of creditors.

The position is similar in Canada however such requirement applies to each class of
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unsecured creditors. In the UK, approval of a plan under administration requires a
simple majority in value of the creditors present and voting.

While such threshold is higher in Singapore as the requirement therein is to obtain 75

percent or more of voting share by value and more than 50 percent voting share in
number of creditors present and voting, for approval of the plan

After due deliberation and factoring in the experience of past restructuring laws in
India and international best practices, the Committee agreed that to further the stated
object of the Code i.e. to promote resolution, the voting share for approval of
resolution plan and other critical decisions may be reduced from 75 percent to 66
percent or more of the voting share of the financial creditors.”

The Insolvency Law Committee submitted its report on 26th March 2018. On 13th April
the Resolution Plan in the Alok CIRP was rejected by COC as it had failed to cross the
prescribed bar of 75%. The bar had proved to be too high.

On 6th June 2018, the President of India gave his assent to an Ordinance that was
promulgated on the recommendations of the Insolvency Law Committee. One of the
provisions directly relevant to the Alok Industries CIRP was,

“With a view to encouraging resolution as opposed to liquidation, the voting threshold

has been brought down to 66 percent from 75 percent for all major decisions such as
approval of resolution plan, extension of CIRP period, etc.”

The bar had been reduced.

The hearing of NCLT that was scheduled on Monday, 11th June 2018, took note of the
Ordinance and being aware that the Resolution Plan had been rejected as it had got 70%
support, directed the Resolution Professional, Ajay Joshi to reconvene the Committee of
Creditors to once again consider the sole Resolution Plan on the table in the light of the
freshly minted Ordinance.

Two days later, on 13th June the CoC reconvened to reconsider the same Resolution
Plan that had been submitted by JM and Reliance and which it had rejected exactly two
months back. It once again got 72.193 percent support, but this time that was good
enough as per u/s 30 (4),

“The committee of creditors may approve a resolution plan by a vote of not less than
sixty six per cent. of voting share of the financial creditors …”

The resolution plan is valued at close to Rs 5,000 crore, in which Rs 4,000 crore would
be used to repay financial creditors. As per the claims admitted by the resolution
professional in the case, financial creditors have submitted claims worth over Rs 29,000
crore.

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Questions were raised in the Parliament. Bharturhari Mahtab of BJD, opposed the
introduction of the Bill that would regularize the 6th June Ordinance, arguing that it
was being done to benefit only one corporate house, i.e. Alok Industries.

“I stand here to oppose the introduction of this Amendment to Insolvency

and Bankruptcy Code (Second Amendment) Bill. A month or so ago, Bhushan Steel
was sold to Tata Steel and 65 per cent of the loan was recovered and 35 per cent was
written off. Steel sector is booming now and nobody asks a question as to who is
responsible for 35 per cent loss or haircut,”

the MP from Cuttack was quoted on the floor on 25th Jul,

“This is nothing but a fixed match. Bad-loan resolution is becoming [a] deep-rooted
nexus between the bankers, auditors and promoters, which is undermining serious
recovery. Alok Industries is a glaring example. Should the law be bent like this? Should
we be the party to this law, this loot? It stinks.”

On 31st Jul, the Bill was passed but it raised questions of crony capitalism once again,
given that there was a single bidder.

The All India Bank Officers Confederation (AIBOC) also condemned the COC decision
of accepting Reliance Industries-JM Financial ARC’s resolution plan with a deep 83 per
cent haircut.

The Liquidation application filed by Ajay Joshi on 14th April was withdrawn on 17 th Jul
2018. This was the first step in the closure of the Insolvency Process.

There is only one possible legal hurdle for Reliance and JM, if the HC or NCLAT takes a
view that the revised provisions of the Second Amendment are applicable only to CIRP
initiated prospectively.

As expected one of the creditors, the dissenting creditor SICOM, on 1 st Aug approached
NCLAT against the NCLT Order to dismiss the Liquidation application, on the grounds
that legislation cannot be applied retrospectively.

While NCLAT has not put a stay on the Resolution Plan or its execution, but the
outcome would be subject to review at NCLAT.

We shall wait and watch on how the newly implemented Reform would play out.

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Author Bio

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 Name: Sanjay Dongre
Qualification: MBA

Company: N/A

Location: Pune, Maharashtra, IN

Member Since: 23 Jul 2018 | Total Posts: 13

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