Corporate Debt Restructuring | CDR as disqualification in tenders

A new condition is being introduced in tender documents by Government authorities in certain States wherein companies that have applied for Corporate Debt Restructuring are sought to be disqualified from bidding. What is the impact of this clause, and the legal validity of the same?

Corporate Debt Restructuring (CDR) mechanism is a process that is governed by the RBI to ensure a timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems.

What is the new tender condition?
Some tenders in the recent past have disqualified CDR applicants from bidding. The new tender condition in some of these tenders is set out below:

Uttar Pradesh
In case of Agra to Lucknow Access Controlled Expressway (Greenfield) Project, UPEIDC introduced the following condition:

Condition: Clause 2.2.2 (B):´The applicant should be financially sound and should not have applied for Corporate Debt Restructuring (CDR) during the last five years.´ In the pre-bid meeting, many companies unsuccessfully tried to get this clause removed.

Delhi
Recently, Delhi Metro Rail Corporation (DMRC) Ltd invited open tenders on Local Competitive
Basis (LCB) for Supply, Installation, Testing and Commissioning of Ballast less Track of Standard Gauge. In the notice inviting tender, the following condition was introduced:

1.1.4.4 Corporate Debt Restructuring: The bidder shall not be currently in the process of financial restructuring under Corporate Debt Restructuring Mechanism.

1.1.4.5 The tender submission of bidders, who do not qualify the minimum eligibility criteria, bid capacity criteria and corporate debt restructuring stipulated in the clauses 1.1.4.2 to 1.1.4.4 above, shall not be considered for further evaluation and considered rejected. The mere fact that the bidder is qualified as mentioned in sub clause 1.1.4.2 to 1.1.4.4 shall not imply that his bid shall automatically be accepted. The same shall be subject to the data as required for consideration of tender prescribed in the ITT.´

Gujarat
Similarly, Narmada Water Resources & Water Supply and Kalpsar Department, issued more than 8 tenders for its SAUNI Yojana. The Pre Qualification Bid of the 8 Tender Notices for the aforesaid project contained a clause disqualifying bidders who had applied for Corporate Debt Restructuring (CDR) in the last two financial years.

Andhra Pradesh
Again, Infrastructure Corporation of Hyderabad introduced following conditions in Notice Inviting Tenders in the ´Chittoor District Drinking Water Supply Project´

Condition No.14.2: ´The Bidder who has applied for corporate debt restructuring (CDR) in the last two financial years (2011-12 and 2012-13) shall not be considered for bid qualification. For this certificate of Chartered Accountant by the bidder must be produced.´

How do we interpret the new condition?
Many authorities have disqualified a person who has applied for CDR in the last few years. Infrastructure companies that have applied for CDR today will face consequences of such application for the next five years irrespective of the change in their financial position.

The DMRC tender condition is not based on application for CDR. It disqualifies a company that is currently in the process of financial restructuring under CDR. In light of the process described above, how do we read the said tender condition? Does the disqualification extend only for the period between filing of application and execution of MRA? Or does it extend to the period when certain adjustments are made after the execution of MRA like promoter bring in their contribution and lenders adjusting the time period of their debts, etc.? Or to the entire period when MRA is effective which can be many years? Thus, this clause is ambiguous and the contractors must seek necessary clarification in the pre-bid meeting if a tender contains this condition.

What are the implications?
The list of infrastructure companies that have applied for CDR is very long and it has grown rapidly in the last 2 or 3 years. The introduction of this clause is of great concern for such companies and infrastructure organisations ought to take up this issue with the Government authorities.

Is the new condition valid? Can it be challenged?
Barring companies under CDR from filing bids may not be an unlawful contract condition as the employer has all rights to check the financial health of the contractors which it wishes to hire for carrying out its works. Courts are slow in interfering with the policy decisions of the Government.

From the contractor´s standpoint, such condition is discriminatory and has no nexus with the ability of the company to execute the contract. The mere fact that the company in the last 5 years has applied for CDR does not indicate anything about its current financial condition. The profitability and financial position of the company can change dramatically especially in 5 years. Thus, it may be discriminatory to bar a company which has in the past merely applied for CDR from other companies. Further, such tenders bar any company which has filed CDR irrespective of whether the said application is accepted or not. There is a big difference between acceptance and rejection of proposal. Only financially viable entities are permitted to go for CDR and thus, acceptance of CDR shows that a company is financially viable. The RFQ already has net worth, profit, turnover and other such conditions which are very specific and if the company fulfills such criteria, its current financial position is established. If such criteria are satisfied by a company, it may be unreasonable to just disqualify the company just because it has applied for CDR in the past. Further, all companies that have defaulted do not necessarily apply for CDR and the vice versa is also true. A company whose loan is still a standard asset can also apply for CDR. Thus, by only debarring a company that applies for CDR without debarring companies that have defaulted in repayment of their loans is discriminatory.

However, from the standpoint of the State, it is always in the wisdom of the Government to put in any condition in the tender notice. The court cannot substitute any terms in the tender notice. The scope of judicial review in the matters of a contract is very limited. The court can interfere if the terms of the tender notice are arbitrary.

Further the scope of the court´s interference is very restricted and limited where State acts reasonably, fairly and in public interest since no person can claim a fundamental right to carry on business with the Government. Greater latitude is to be conceded to State authorities in matters of formulating conditions of tenders and awarding contracts. Interference by court is not warranted unless action of tendering authority is mala fide and there is misuse of statutory powers. Nor would a court interfere because it feels some other terms in the tender would have been fairer, wiser or more logical. Certain preconditions or qualifications for tenders have to be laid down to ensure that a contractor has the capacity and resources to successfully execute work. Thus, if in the wisdom of the State Government such CDR condition is introduced in public interest for ensuring timely project completion, the tender condition may not be quashed by the Court.

Several writ petitions have been filed challenging the validity of CDR tender condition on some of the grounds discussed above. For instance, writs have been filed in the High Courts of Andhra Pradesh, Uttar Pradesh and Gujarat. Of the three courts, Gujarat High Court has upheld the validity of the condition inserted in tenders issued under SAUNI Yojana (that is discussed above). However, this decision has been challenged and is pending in the Supreme Court. Allahabad High Court while dealing with the matter of Agra to Lucknow Access Controlled Expressway has reserved the decision on validity of the CDR condition. Meanwhile, it has permitted the authority to open the bids on the condition that bid of HCC (the party which challenged the CDR condition) may also be scrutinised to see whether it fulfills all the other required conditions in regard to technical capability, financial capacity and other requirements as prescribed in the RFQ document.

Another writ was filed in Hyderabad, challenging the condition introduced by Infrastructure Corporation of Hyderabad. The said matter is shown as disposed in the High Court online database but no order is available.

We can say that there is no finality on the validity or otherwise of this tender condition. However, as the courts are slow in interfering with policy decisions, some of these CDR conditions may be upheld. However, the State needs to consider that such CDR condition would be unfair against the CDR contractors as then it will become more difficult for such contractors to come out of their losses. Instead of this, the infrastructure associations should consult with authorities to consider alternative conditions like requiring CDR companies to provide additional value of guarantees rather than barring them completely.