Last Updated : Apr 04, 2018 09:53 PM IST | Source:

Are companies using Insolvency and Bankruptcy Code to subvert the system?

Partisan behaviour by insolvency professionals, wrongful delay of bidding and diversion of funds are a few allegations against companies.

Moneycontrol News @moneycontrolcom

The Insolvency and Bankruptcy Code (IBC), which was introduced in 2016 to help financially-troubled corporates, is in fact giving banks a run for their money when it comes to subversion of processes.

In June 2017, the Reserve Bank of India (RBI) identified 12 non-performing accounts or assets (NPAs), totaling 25 percent of India's gross NPAs, which could be immediately taken up under the Insolvency and Bankruptcy Code (IBC).

Following this, companies like Essar Steel and Educomp Solutions had filed for insolvency resolution under provisions of the Code.

But the matter may not be as black and white as it looks. Senior officials from large accounting firms that Moneycontrol spoke to, said that a few companies have been trying to subvert the system subtly. They refused to be identified, citing conflict of interest, since they also happen to be official auditing partners for these firms.

For instance, an eligible bidder for a stressed asset could be kept waiting by companies, who would get their kin or close partners to participate in the bidding process.

"You can never legislate for human ingenuity. There are always ways to subvert the system. Courts can only legislate to an extent," said a senior legal expert specialising in debt resolution.

According to a report by The Wire, Educomp Solutions started transferring its core business to other companies having strong links with the original promoter, before taking the original corporate entity to bankruptcy court.

The report also stated that the flagship entity went to the National Company Law Tribunal (NCLT) seeking to start insolvency proceedings in May 2017. But here, only two companies finally submitted bids and both of them were old business partners of the original promoter.

Also read: Did Educomp IBC, questions report

"From the time that senior company executives are able to see a financial crisis in the foreseeable future, some entities have been found to be trying to create a co-dependent entity. The major assets are transferred which can act as a safety net for the promoter and promoter group," said a senior forensics official at one of the big four accounting firms.

In 2017, there were a few reported cases of alleged partisan behaviour. According to a report, Edelweiss ARC had approached the National Company Law Appellate Tribunal (NCLAT) in September, 2017, opposing the debt recast plan for Synergies Dooray Automotive on the grounds that the deal was fraudulent, void, and set a wrong precedent.

The report said that Edelweiss ARC has also complained to Insolvency and Bankruptcy Board of India about what it termed as partisan actions by Mamta Binani, the resolution professional appointed for Synergies Dooray Automotive.

However, Binani refuted these allegations saying that the resolution had happened with the National Company Law Tribunal's (NCLT) approval, which had heard and set aside Edelweiss’s objections.

Any creditor(s) can has the right to take a corporate entity to the NCLT  for insolvency proceedings if there is a default on debt or interest payment. These cases are referred to the NCLT on priority under the IBC.

The insolvency professional (IP), who will then take over the running of the company, gets 180 days (six months) to come up with a viable solution to enable repayment of loans. The period can be extended by another 90 days.

No action can be taken against the company or its assets during these 270 days, or the 9-month period. If the company under the IP fails to come up with a solution within 270 days, a liquidator will be appointed and all assets will be liquidated to repay the debt.

Forensic experts also pointed out that while on one hand, companies may push the main entity in question to liquidation, the core assets may lie elsewhere. In these cases, the complex web of related party transactions are difficult to ascertain, especially since the time given is limited.

"Since the IP appointed may or may not have past experiences on such murky dealings, it could be used to a company’s advantage to divert funds," said the official quoted above. He, however, added that this was primarily found in some firms in the engineering and manufacturing segments.

Another area where companies want relief once the case goes to NCLT is the penal interest accumulated on the unpaid debt. Officials with whom Moneycontrol spoke to, said that companies also try to evade payment of this interest amount, which often amount to a few hundred crore rupees.

In this space, the entire onus is on the IP to dig deeper into the process. Legal experts point out that if the professional is not able to do adequate due diligence before the resolution plan is approved, overruling this entire process could prove to be a challenge.

While loopholes in the IBC with respect to the insolvency professionals could be looked at by regulators in the near future, it is still not clear whether these will have a retrospective effect.

First Published on Apr 4, 2018 09:53 pm
More From
Follow us on
Available On
PCI DSS Compliant