Corruption and Abuse Threaten Modi Government’s Showcase Bankruptcy Law
Apart from the Goods and Services Tax (GST), launched with much fanfare at midnight in Parliament, the bankruptcy law was the second showpiece legislation of this government to transform India. It promised to put an end to financial loot by corporate India of public sector banks (PSBs), with swift and efficient completion of insolvency proceedings.
The Insolvency and Bankruptcy Code (IBC) or bankruptcy law, which took off with ruthless efficiency in 2016, is in a shambles today plagued by charges of corruption, fixed deals between corporate houses and lenders. Compounding the problem is a big shortage of qualified people to enforce the law, leading to dubious judgements.
On 22nd July, our columnist V Ranganathan called the Supreme Court (SC) order by the bench comprising justices Indira Banerjee and JK Maheshwari on Vidarbha Industries a 440-Volt shock to the bankruptcy code. For one, it has put the operational creditor on a better footing than the financial creditor. But worse, he says, the order struck at the very core of the bankruptcy process by giving the National Company Law Tribunal (NCLT) the discretion to admit or reject initiation of the insolvency process even when there was a real default!
This means that every company would waste precious time arguing against admission of cases, badly delaying the already flagging timelines of a creaking Act. So, it will be back to the pre-bankruptcy code days for creditors when the mere existence of a default wasn’t enough; creditors needed to establish the default before winding up proceedings could start.
The legal community and the media have taken a month to wake up to the implications which overturn past legal precedents establishing the primacy of the committee of creditors (CoC) comprising secured financial creditors. A review petition may be filed to clarify things; but  since Vidarbha Industries is a part of the Anil Dhirubhai Ambani Group (ADAG)  the reaction of the  legal community is perhaps muted.
At the same time, the government needs to examine and address the problem, if any, of private infrastructure companies, such as Vidarbha Industries, which has claimed that the  loan default occured because of pending legal disputes that blocked its ability to pay. This takes us to a stickier ground and opens the doors to a new set of contrived disputes (over tariffs, cost overruns, quality, etc) which would derail the bankruptcy law for infrastructure companies anyway.
Let’s not forget that a large part of the delay in resolving the failed Infrastructure Leasing & Financial Services (IL&FS) is due to  claims and counter-claims by different classes of creditors which have remained unresolved in all cases where a dominant equity holder is not available to take over a special purpose vehicle (SPV). It is the same with the real estate sector, where the Supreme Court repeatedly came to the rescue of home-buyers. It is only in June 2022 that the insolvency and bankruptcy board of India (IBBI) invited suggestions to address these issues and ensure expeditious resolution of real estate projects.
Corruption and Fixing
This Vidarbha order is only the latest in a series of blows to the credibility of the bankruptcy process. Allegations of rampant corruption and fixing, that have dogged this legislation, have never been addressed, despite prime minister (PM) Narendra Modi’s promise to crack down on corruption in 2014. Over a year ago, industrialist Harsh Goenka tagged @PMOIndia and tweeted: “Promoters stash away money on the side, take the company to the cleaners, get a 80-90% haircut from bankers/NCLT—that’s the new game in town. A lot of institutions cleansed by the government - NCLT next please @PMOIndia. We can’t have our hard earned public money being stolen!” That was when bankers had willingly accepted haircuts of 90% or more which had led to public outrage. Media reports had suggested that the government was planning a review of the insolvency code. Nothing has happened.
There are only two reported cases of the central bureau of investigation (CBI) having intervened on charges of corruption. The first was in January 2020, where an interim resolution professional (IRP) was arrested for receiving a bribe of Rs3.5 lakh by threatening to file a criminal case against someone. The next was in April 2022 when the CBI laid a trap on arrested an IRP in Pune for demanding Rs20 lakh from a company to ensure that there was no coercive action against it.
As against this, on 11th August, ET Prime published an explosive report about a Rs1,000 crore “cash-for-orders” scam where a resolution professional (RP) has alleged that a recently retired technical member of the NCLT, Chennai, had been delivering crucial orders in favour of the highest bidder. He has sought a CBI investigation into these allegations.
The report says that RPs and even chartered accountants  have filed many complaints with the government; but, instead of ordering a detailed investigation, authorities ask them to provide proof to back their charges. Meanwhile, rampant corruption and collusion between lenders and failed businesses with complicit RPs is an open fact. The draconian nature of the law, which was meant to ensure speedy resolution, has left many operational creditors with valid claims (home-owners, depositors and infrastructure project contractors) in the lurch. These remain unaddressed.
Let’s not forget that large corporate defaults only accumulate after years of collusion between banks and borrowers, when banks turn a blind eye to the diversion of funds and ever-greening of accounts. The bankruptcy law now allows the same secured lenders to close these loans with massive write-offs or allow them to be bought cheap through a seemingly-independent front entity.
Vacancy and Competency
While corruption remained untouched, the resolution effort is further hit by a shortage of judicial and technical members. Moneylife reported recently that nearly 50% or 30 posts out of the 63 sanctioned for members of NCLT are vacant. Action to fill up these vacancies is slow and sporadic. There is the curious circular saying NCLT has decided to hear only urgent cases via video conferencing that was hurriedly withdrawn as though to avoid public acknowledgement of a genuine problem.
The issue is not about vacancies alone—the quality of persons appointed to the NCLT, as evident in some of the orders issued, is often a bigger embarrassment. This has not been addressed in the past six years. Earlier, the government did not extend the tenures of NCLT members who had complaints against them, but the next round of appointees will have a mandatory five-year tenure with the potential for bad appointments to do a lot more damage.
Since many NCLT members do not have the requisite knowledge of business, accounts, finance or law, we hear that legal firms prepare orders, which are typed and issued without any change. Some RPs insist that, unless the government works at creating a dedicated cadre of professionals under the IBBI, the results of resolution processes will remain random and patchy.
In the early days of the law, many competent bankers with long experience were keen on participating in the resolution process because they felt that a powerful new law, which was being watched and monitored by the PM himself, would help revive or turnaround many companies under a new management. In less than a year, it was clear that the focus was on six of seven large defaulters. These remain the big show-pieces on which the efficiency of the Act continues to be touted. The reality is that the bankruptcy legislation needs to be  quickly amended and fixed because it is already sliding into oblivion like a dozen earlier laws that were passed with the laudable objective of reviving sick businesses.
Earlier this month, it was reported that the government is, indeed, planning to amend and strengthen the IBC and reduce delays. But new orders and new challenges appear to be surfacing faster than the proposed reform. In any case, amendments to a law with far-reaching consequences, like the bankruptcy code, ought not to be done furtively or in haste. It needs wider discussion and comprehensive action or we will end up with patchy fixes.
1 year ago
Very well articulated. 70% haircut and the banks have potential to lead the bankruptcy tag and the borrowed firms go winning. The idea of IBBI has been that the firms should keep functioning if they are worth their salt and resolve their debt issues. The resolution process unfortunately ended up in winding up the firm and all arguments moved in this direction eversince its creation. RP, after listing all the four types of creditors, financial, operatinoal, sovereign and others and accord priority for resolution, should steer through the Committee of Creditors in the directions of enhancing functionality of the corporate enterprise. If winding up is the only best solution, the time 180-250days is too long providing scope for manipulation at different levels. This is necessarily avoidable. Resolution of MSMEs shoud be done within a maximum of 50 days and corporates within a maximum of 90days. The Act should be amended. The Act should also have facilitation of registering Resolution Enterprises that have capability at the operational level and not at the Board level. At present, the RE should have over 50% of its directors as Resolution professionals. Directors would not be at the operating level but at the governance levels. At the Board level, Risk Management Committee shoud have at least two Resolution Professionals. Therefore, there is need for looking afresh at the whole structure and Rules governing the IBBI Act.
1 year ago
Painful to read the article.
1 year ago
Nowadays, in all things, we need to ask "Who Benefits?" The answer is found in the "Going On's".
The country was hard struck one night by Demonetization, which promised a cure for Black Money.
Today, claims are made that the Ruling Party is offering crores of rupees to legislators to defect. Why are the so-called "efficient-when-it-suits" enforcement agencies not taking Suo-moto cognizance
and commencing a probe?
1 year ago
it is poorly drafted , ambiguously worded and capable of flexi interpretation which gives Babbooos discretion to extract rent
1 year ago
As 2024 approaches, there will be more haircuts, tonsures and face shaving artifices. Any number of temple rescues by this Govt will not lead this govt to heaven.
1 year ago
1 year ago
When it was launched looked very promising but till now none of the referred ones has help the small depositors and have made only the coc and legal people get hefty pockets at the expense of the retail depositors who have been left in the lurch and it is like robbing peter to pay paul.Legally it is getting siphoned to the rich people like the coc and so called people lawyers .Very badly done and already DHFL Is a good example of it where coc and legal people and piramal group are laughing at retail investors as how they they have fooled the retail people with the help of nclt and ibc which the present govt has brought and made the black money to white to these corrupt people.Before this at least it was good we were getting some money and now nothing.Also in the income tax there should have been given a provision to address the losses to give some benefit to people already lost money
Kamal Garg
Replied to r_ashok41 comment 1 year ago
How can NCLT and CoC permit and approve the valuation of more than Rs. 40,000 crores of outstanding and doubtful debts of DHFL with a valuation of Re. 1 (Rupee One ) only. Is it not complicity of the highest order. And therefore, the law and Supreme Court has to take action on this.
How can even RBI allow and approve the writing-off of equity share capital of Lakshmi Vilas Bank to zero while not touching the AT-1 bonds issued by the bank, whereas, in a gap of not more than 6 months, same RBI allowed and approved the writing-off of AT-1 bonds of Yes Bank at zero valuation while not touching the share capital at all.
1 year ago
Exquisite article. Should I burst in laughter or burst into irritation?
1 year ago
Even to the lay-person Citizen of India, some of what is happening with the IBC appears to be a blatant set-up of shell companies receiving funds from hazy sources, and then picking up the assets of the declared bankrupt entities for a fraction of the real value by one means or the other. Thanks for bringing this up, MoneyLife, as it looks like becoming bigger than the NPA and Fraud Bank Borrower issues.
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