INSOLVENCY PROCEEDINGS IN INFRASTRUCTURE PROJECTS

The extreme financial crisis that construction contractors in India are facing as a result of public sector undertakings (PSUs') inability to discharge their final payments cannot be dismissed or ignored. Due to India's late-payment tradition, such delayed payments have had a significant impact on the building industry. This culture has ultimately resulted in the insolvency of businesses under the Insolvency and Bankruptcy Code 2016 ("IBC"). This article examines some of the most significant cases in the infrastructure industry and seeks to identify the root causes of the infrastructure insolvency logjam. The article also examines the recent adoption of the pre-packaged insolvency resolution process and its impact on India's infrastructure and construction sectors.

Introduction

Because infrastructure contracts are long-term, a project business is likely to face financial issues during the contract's length. Increased building costs or difficulty securing funds may cause problems during the construction phase, but lower-than-expected revenues and consequent repayment concerns may cause problems during the operations phase. If these issues persist, the Project Company may declare bankruptcy, jeopardizing the project's capacity to provide the services it was supposed to provide. Contractors are also at risk of declaring bankruptcy for a variety of reasons, including ones unrelated to the project. Contractor insolvency may not lead to Project Company collapse, but it might negatively impact public delivery, especially in the short term.

Under the IBC, a creditor may commence the corporate insolvency resolution process before the adjudicating body, the National Company Law Tribunal ("NCLT"), if the firm defaults.

Insolvency in EPC Companies

The acronym EPC stands for Engineering, Procurement, and Construction. EPC businesses in India are responsible for the design, procurement of materials and equipment, and construction of projects in diverse industries such as power, infrastructure, oil and gas, and more. EPC businesses in India have contributed significantly to the country's economic development by carrying out large-scale projects in a variety of areas. These organizations have the knowledge and skills to complete turnkey projects ranging from design and engineering to construction and commissioning.

Larsen & Toubro is a key player in India's EPC business. The company has a substantial presence in the infrastructure and power sectors, having completed numerous large-scale projects in India. Another prominent EPC business in India is the state-owned Bharat Heavy Electricals Limited (BHEL), which is heavily involved in the power sector.  The Indian EPC business has faced some hurdles in recent years as infrastructure development has slowed and project clearances have taken longer than expected. However, the Indian government's emphasis on infrastructure development, along with a rise in private sector investment, is likely to enhance the EPC business in the future years. The insolvency of EPC companies in India has become a significant worry in recent years. Several factors contribute to this, including delays in project approvals, a slowdown in infrastructure development, and a shortage of money.

Delayed project clearances are a key cause of insolvency in EPC companies. These delays result in cost overruns and a lack of cash flow, making it difficult for businesses to maintain operations.

Another significant reason for insolvency in EPC firms is a slowdown in infrastructure development. This has resulted in a drop in demand for EPC services and a reduction in revenue for businesses. Lack of capital is another important reason contributing to the insolvency of EPC companies in India. Many businesses are unable to obtain funding from banks and other financial institutions due to their low financial standing. EPC companies in India can be resolved in a variety of ways, including debt restructuring, insolvency processes, and mergers and acquisitions.

Debt restructuring is one approach for EPC companies to overcome financial issues. This entails renegotiating the terms of the company's debt with its creditors to make it more manageable. This may involve extending the payback duration, lowering the interest rate, or converting debt to equity. (Reference: "Debt Restructuring in India," KPMG). Insolvency proceedings are another avenue for EPC companies to settle financial challenges. Insolvency proceedings are begun when a firm is unable to pay its debts as they become due. The Insolvency and Bankruptcy Code (IBC) was enacted in India in 2016 to offer a framework for the resolution of bankrupt firms. Under the IBC, the resolution professional proposes a resolution plan, which may involve asset sales, debt restructuring, or mergers and acquisitions.

Mergers and acquisitions are a third option for EPC businesses to handle financial challenges. This refers to the merger or acquisition of a firm by another company in order to improve the company's financial status. Mergers and acquisitions can help an EPC firm gain access to new markets, customers, and resources.

There are various case studies of insolvency among EPC companies in India, notably Lanco Infratech Limited and Jaypee Infratech Limited. Lanco Infratech Limited was among the 12 largest corporations advised by the RBI to enter the insolvency procedure when the Code was originally adopted. Lanco was once one of the country's largest infrastructure businesses, overseeing many major infrastructure projects. Lanco's success was alleged to be due to political connections, and it peaked during the UPA era. However, due to a variety of factors, including changes in government rules governing the power sector, the company quickly accrued massive debts that it was unable to pay. The company was experiencing financial challenges due to project approval delays, cost overruns, and a lack of cash flow.

The company was admitted to the Corporate Insolvency Resolution Process, and numerous of its subsidiaries were also placed under insolvency proceedings.

Jaypee Infratech Limited was experiencing financial difficulties due to delays in project clearances, a slowdown in infrastructure construction, and a lack of capital. The company was accepted to the insolvency resolution process in 2017, and its assets were taken over by an interim resolution professional under the IBC. The case involved the claims of thousands of homebuyers. The dispute is still ongoing, and the creditors' claims have not yet been resolved. This is owing to different litigations, and despite the fact that the Supreme Court had required that the CIRP be completed within 90 days in 2019. The matter is still pending.

 Gammon India Limited was admitted to insolvency because the company was experiencing financial difficulties as a result of project approval delays, cost overruns, and cash flow issues. As a result, some of its subsidiaries have gone through the insolvency resolution procedure under IBC.

This article examines the insolvency procedures involving Era Infra Engineering Ltd. and MBL Infrastructures Ltd., two major players in India's infrastructure sector. It investigates the complexities and obstacles encountered during their Corporate Insolvency Resolution Processes (CIRP), offering light on legal, procedural, and economic issues. The article begins with an introduction of firms and the regulatory framework given by India's Insolvency and Bankruptcy Code (IBC), before delving into the specific example of Era Infra Engineering Ltd. The beginning of bankruptcy procedures by Union Bank of India, combined with legal arguments over winding-up petitions and jurisdictional concerns before the National Company Law Tribunal (NCLT), paved the way for a thorough investigation. The analysis includes the proposed resolution plans as well as the resulting conflicts over Special Purpose Vehicles (SPVs) and disputed receivables, which all lead to considerable delays in the resolution process. Furthermore, the influence of continuing legal procedures, including measures by enforcement authorities, adds to the timetable for resolution. In contrast, the case of MBL Infrastructures Ltd. provides a different perspective, exposing issues with the eligibility of resolution applicants under Section 29A of the IBC and the exclusion of time spent in litigation from the CIRP timelines. The intervention of the National Company Law Appellate Tribunal (NCLAT) and its appraisal of the viability of the resolution plan sheds light on the dynamics of the resolution process.

The study also addresses recent adjustments to the IBC in response to the COVID-19 pandemic, such as the suspension of insolvency procedures and changes in default thresholds, emphasizing the necessity for both short-term relief measures and long-term policy improvements. Finally, the paper makes recommendations for improving the efficiency and efficacy of bankruptcy resolution processes in the infrastructure sector, highlighting the significance of comprehensive policy measures to revitalize stressed enterprises and support long-term growth.

Conclusion

Construction businesses supply plumbing services for India's infrastructure. A hostile contracting, financing, payment, and arbitration process in India has ripped these pipes apart. Hundreds of mid-to-large EPC firms have gone bankrupt, numerous others have been liquidated for less than 1% of their initial worth, and disputed claims totaling hundreds of millions of crores are wending their way aimlessly through arbitration. While pre-packaged insolvency resolution processes provide a mechanism for redressal of corporate debtors (micro, small, and medium enterprises), it's important to take steps to ensure timeliness and avoid unnecessary delays as outlined in the IBC. Additional NCLTs may be introduced to address the application logjam.

Many of India's construction giants are going bankrupt. Infrastructure firms worth billions of dollars are now being liquidated for pennies on the dollar. This is not the result of reckless promoters, fraud, or the free market producing an unavoidable outcome. Rather, it is the outcome of a hostile regulatory environment. The abrupt demise of Mumbai airport operator GVK Power and Infrastructure is the latest in a long line of construction and infrastructure companies that have been progressively deteriorating and declaring bankruptcy for many years. Six of the top 10 infrastructure businesses have gone bankrupt or are struggling to stay afloat in recent years as market capitalization has plummeted and sales and profitability have declined.

The recently notified Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, effective September 30, 2021, aim to address delays in the corporate insolvency resolution process by limiting the number of times the invitation of expression of interest, request for resolution plan (RFRP), and resolution plan can be modified. Stabilising the infrastructure economy remains a significant challenge.

Sources

·       “EPC Companies in India: A Brief Overview,” Invest India

·       “Why EPC companies in India are facing insolvency,” Economic Times

·       “EPC companies in India: Stuck in a tough spot,” Business Today

·       “EPC Companies in India: A Brief Overview,” Invest India

·       https://ijpiel.com/index.php/2021/10/18/analysis-of-insolvency-in-the-infrastructure-regime/