Games Resolution Applicants Play

Resolution applicants (RAs), who are potential investors aiming to take over and revive an insolvent company, may sometimes employ certain tactics to acquire the company at a reduced cost, or otherwise ensure terms that primarily favor their own interests, often at the expense of creditors or other stakeholders. Here are some common strategies RAs may use to manipulate the insolvency resolution process, along with the implications: Strategic Underbidding with Insider Support

 Tactic: An RA may submit a low-value bid with the tacit support of certain influential creditors or committee members. By convincing these stakeholders that a low bid is acceptable due to various “risks” associated with the business, the RA can discourage other bidders and push through an undervalued offer.
 Impact: This strategy can undervalue the company’s assets, reducing recovery for creditors and leading to unfair terms for operational creditors and other stakeholders.
 Countermeasure: Creditors should independently assess the company’s value and maintain competitive bidding practices to prevent undue influence from lowering the bid value.

Ambiguous Clauses in the Resolution Plan

 Tactic: RAs might insert vague or conditional clauses in their resolution plan, especially regarding timelines for payment, asset management, or employee retention. Such clauses provide them with flexibility to back out or renegotiate terms later.
 Impact: Ambiguity in the plan can lead to disputes during implementation, allowing the RA to delay payments, renegotiate terms, or even withdraw if the terms become unfavorable.
 Countermeasure: Creditors and the NCLT scrutinize resolution plans for clarity, and conditions are reviewed carefully to ensure there are no exploitable loopholes.

Back-Door Agreements with Operational Creditors

 Tactic: An RA may enter into covert agreements with select operational creditors, promising them better repayment terms if they support the RA’s plan. This can give the RA an edge in securing approval for their proposal.
 Impact: Such arrangements create an unequal playing field, potentially sidelining other creditors and affecting the fair distribution of assets.
 Countermeasure: Transparency in negotiations and creditor committee oversight can help reduce the likelihood of back-door agreements.

Intentional Delays in Plan Implementation

 Tactic: Once a resolution plan is approved, an RA may intentionally delay implementation by raising minor or procedural issues. This stalling tactic creates leverage to renegotiate terms or reduce the payout amount.
 Impact: These delays can increase costs, harm the company’s operations, and impact the timely recovery of creditors, frustrating the purpose of the CIRP.
 Countermeasure: Strict timelines for plan implementation under the Insolvency and Bankruptcy Code (IBC) and the NCLT’s authority to impose penalties for non-compliance help deter intentional delays.

Raising Litigation to Renegotiate Terms

 Tactic: RAs may instigate or encourage litigation over minor issues during or after plan approval. This allows them to delay payments or push for renegotiation, sometimes demanding concessions under the guise of unforeseen legal challenges.
 Impact: Litigation disrupts the resolution timeline, creating uncertainty for creditors and potentially reducing their recoveries. It also damages the business’s stability and market reputation.
 Countermeasure: Detailed scrutiny of the resolution plan by the NCLT and creditor committees, along with legal provisions for timely dispute resolution, can help mitigate the impact of post-approval litigation.

Coordinating with Suspended Management

 Tactic: In some cases, RAs may collaborate with suspended directors or former management to devise a resolution plan that indirectly benefits them, allowing the former management to retain some influence in the business.
 Impact: This arrangement can lead to biased business decisions that favor past management rather than prioritizing company revival and creditor recovery.
 Countermeasure: Suspended directors are generally excluded from CIRP participation, and the creditor committee carefully reviews any such conflicts of interest in the RA’s plan.

Using Unrealistic Assumptions in Financial Projections

 Tactic: An RA might present overly optimistic financial projections or cash flow assumptions in their resolution plan to make it appear more attractive. They may also understate future expenses or liabilities.
 Impact: This can mislead creditors into approving a plan based on unrealistic recovery expectations, potentially leading to future financial strain on the company or unmet promises.
 Countermeasure: Creditors typically conduct their own due diligence and stress-test financial projections to identify overly optimistic or unrealistic assumptions.

Pressuring Smaller Creditors with Voting Power

 Tactic: RAs might selectively target smaller creditors, either through coercion or promises of favorable treatment, to gain their support in the creditors’ committee. This can shift voting dynamics in favor of the RA’s plan.
 Impact: Coercing or incentivizing smaller creditors distorts fair voting and can lead to approval of a resolution plan that does not maximize overall recovery.
 Countermeasure: Voting rights are proportionate to the value of claims, helping to ensure that larger creditors have more influence. Transparency and creditor committee monitoring help detect undue influence.

Manipulating Asset Valuation

 Tactic: In some cases, an RA may influence asset valuations by hiring biased evaluators or presenting misleading information. Lower valuations make the company appear riskier, justifying a lower bid.
 Impact: Inflated risks or lower valuations reduce the competitive nature of bidding and affect creditor recovery, allowing the RA to secure assets at a lower cost.
 Countermeasure: Multiple independent valuations and creditor committee scrutiny help ensure fair and accurate valuations of the debtor’s assets.

Deliberately Avoiding Long-Term Obligations

 Tactic: RAs may structure the plan to avoid or minimize long-term commitments, such as employee retention, social obligations, or environmental compliance, by using vaguely defined terms or non-binding commitments.
 Impact: The absence of enforceable long-term obligations can harm stakeholders like employees, the community, and creditors reliant on gradual debt recovery, while benefiting the RA’s short-term interests.
 Countermeasure: Creditors and the NCLT can mandate specific, enforceable commitments in the resolution plan to ensure RAs meet their obligations over time.

Preventive Measures and Safeguards in the IBC Framework The Insolvency and Bankruptcy Code has established several measures to prevent misuse of the CIRP by resolution applicants:

 Detailed Scrutiny of Resolution Plans: Creditors and the NCLT carefully review plans for feasibility, viability, and compliance to prevent exploitative terms.
 Penalty for Delays: Non-compliance or delays in implementation can result in penalties, deterring RAs from intentionally stalling or renegotiating after approval.
 Mandatory Disclosures: RAs must disclose all relevant details, including financial health and any association with prior management, ensuring transparency.
 Role of Creditors’ Committee: The creditors’ committee has significant authority in evaluating and approving resolution plans, making it harder for RAs to manipulate terms in their favor.
 Regular Audits and Oversight by the IBBI: The Insolvency and Bankruptcy Board of India (IBBI) and NCLT provide oversight to monitor the process, investigate complaints, and ensure ethical practices in the CIRP.

These safeguards are designed to promote a fair and transparent process, prevent collusion, and ensure that resolution plans serve the interests of all stakeholders involved, particularly the creditors and employees of the corporate debtor.

In tackling the games played by resolution applicants during the insolvency resolution process, AI agents can be instrumental in enhancing fairness, transparency, and efficiency. Below are detailed descriptions of the types of AI agents that can assist in addressing these challenges:

1. Bid Evaluation and Fraud Detection Agents Purpose: To detect collusion, underbidding, or biased practices in the bidding process. Capabilities: Analyze bidding patterns, financial projections, and past behaviors of resolution applicants (RAs). Use predictive analytics to identify suspicious bidding trends, such as abnormally low bids or coordinated bidding among applicants. Detect anomalies in financial data and evaluate whether claims and valuations presented by the RA align with market standards and past data. Impact: Improves fairness in the bidding process by highlighting irregularities. Assists creditors in identifying fraudulent or collusive behavior, ensuring that bids are evaluated based on merit.
2. Resolution Plan Validation Agents Purpose: To scrutinize the feasibility, viability, and compliance of resolution plans. Capabilities: Assess the financial projections, operational plans, and timelines proposed by RAs for plausibility and risks. Use scenario analysis to simulate the outcomes of the plan under different market conditions, identifying overly optimistic or unrealistic assumptions. Verify compliance with IBC requirements, including enforceability of long-term commitments (e.g., employee retention, environmental compliance). Detect ambiguous clauses or loopholes in the plan that could lead to disputes or delays. Impact: Helps creditors evaluate the viability of resolution plans more accurately. Reduces disputes and delays in implementation by ensuring clarity in the resolution plan.
3. Voting Influence Analysis Agents Purpose: To monitor voting dynamics and detect undue influence or coercion in the creditors' committee. Capabilities: Analyze voting patterns to detect irregularities, such as block voting by small creditors influenced by RAs. Use NLP to assess communications between RAs and creditors for evidence of coercion or preferential treatment. Simulate alternative voting scenarios to ensure decisions align with the collective interest of creditors. Impact: Maintains transparency in the voting process and prevents manipulation. Safeguards the interests of all stakeholders by ensuring fair representation in decision-making.
4. Valuation Verification Agents Purpose: To ensure accurate and fair valuation of the debtor’s assets. Capabilities: Compare asset valuations presented by RAs with independent market data, historical valuations, and sector benchmarks. Identify discrepancies or inconsistencies in valuation reports and detect biased evaluators. Use AI-based financial modeling to generate independent valuations and stress-test the RA's assumptions. Impact: Prevents undervaluation of assets, ensuring fair recovery for creditors. Discourages manipulation of valuations by RAs to secure lower bids.
5. Legal Compliance Monitoring Agents Purpose: To ensure resolution plans and implementation align with IBC regulations and timelines. Capabilities: Track compliance milestones and deadlines for plan implementation. Verify that RAs adhere to their commitments, such as timely payments and operational obligations. Generate alerts and reports for non-compliance, enabling creditors and regulators to take timely action. Impact: Reduces delays and ensures adherence to timelines. Promotes accountability by monitoring RA obligations.
6. Litigation Risk Prediction Agents Purpose: To anticipate and mitigate litigation risks arising from resolution plans. Capabilities: Analyze resolution plans and creditor interactions to identify clauses or actions likely to trigger disputes. Use past case data to predict the likelihood of litigation and recommend proactive measures to address potential issues. Provide legal teams with case law and precedents relevant to the identified risks. Impact: Minimizes disruptions caused by litigation. Helps stakeholders address contentious issues before they escalate into disputes.
7. RA Due Diligence Agents Purpose: To assess the financial health, credibility, and historical behavior of RAs. Capabilities: Gather and analyze data on RAs, including financial records, past insolvency participation, and any associations with former management. Use anomaly detection to identify RAs with questionable financial health or conflict-of-interest risks. Provide risk scores for RAs based on their financial stability, reputation, and compliance history. Impact: Enhances the quality of RA selection by identifying credible and capable applicants. Mitigates risks of collusion or undue influence from past management.
8. Implementation Monitoring Agents Purpose: To oversee the implementation of resolution plans and ensure accountability. Capabilities: Monitor financial transactions, operational changes, and compliance milestones in real time. Use NLP and data extraction to track adherence to commitments, such as employee retention and environmental compliance. Generate automated alerts for delays or deviations from the approved plan. Impact: Ensures timely and effective implementation of resolution plans. Builds trust among stakeholders by holding RAs accountable for their commitments.
9. Sentiment Analysis Agents Purpose: To gauge stakeholder sentiment regarding the RA’s plan and its implementation. Capabilities: Analyze creditor and employee feedback through surveys, emails, and meetings to assess their sentiment about the RA’s intentions and performance. Monitor public sentiment, including media coverage and social media, to identify reputational risks associated with the RA. Generate reports highlighting areas of concern or dissatisfaction. Impact: Provides early warnings of potential disputes or dissatisfaction among stakeholders. Helps address concerns proactively, ensuring smoother implementation.
10. Regulatory Oversight Agents Purpose: To support regulators like the NCLT and IBBI in ensuring fairness and transparency. Capabilities: Monitor the entire insolvency resolution process to detect non-compliance, collusion, or unfair practices. Provide regulators with detailed reports and evidence to facilitate investigations and decision-making. Use AI-powered legal research to assist in drafting orders or judgments. Impact: Enhances regulatory oversight and enforcement of ethical practices. Builds trust in the insolvency framework by ensuring justice and transparency.

Integration and Collaboration To maximize impact, these agents can be integrated into a centralized “Insolvency Resolution AI Platform” that allows creditors, regulators, and stakeholders to collaborate and monitor the entire process. This platform could feature dashboards, automated alerts, and real-time analytics, enabling stakeholders to make informed decisions and respond quickly to emerging risks. By employing these AI agents, insolvency resolution can become a more robust, transparent, and equitable process, ensuring that stakeholders’ interests are protected while promoting fair resolution outcomes.