Corruption and abuse threaten Modi government’s bankruptcy law

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Apart from the Goods and Services Tax (GST), launched with great fanfare at midnight in Parliament, the Bankruptcy Act was the second flagship piece of legislation of this government to transform India. He promised to end financial plunder by India’s Public Sector Banking (PSB) companies, with a speedy and effective closure of insolvency proceedings.

The Insolvency and Bankruptcy Code (IBC) or bankruptcy law, which took off with ruthless efficiency in 2016, is now in shambles, plagued by accusations of corruption, rigged deals between companies and lenders. The problem is compounded by a great shortage of qualified people to enforce the law, leading to questionable judgements.

On July 22, our columnist V Ranganathan called the Supreme Court (SC) order by the bench consisting of Justices Indira Banerjee and JK Maheshwari on Vidarbha Industries a 440 volt shock absorber to the bankruptcy code. On the one hand, it placed the operational creditor in better conditions than the financial creditor. But worse, he says, the order struck at the very heart of the bankruptcy proceedings by giving the National Company Law Tribunal (NCLT) the discretion to grant or deny the commencement of insolvency proceedings even in real fault!

This means that each company would waste valuable time arguing against the admission of cases, significantly delaying the already faltering deadlines of a creaking law. So, it will be back to the pre-bankruptcy code days for creditors where the mere existence of a default was not enough; creditors had to establish default before liquidation proceedings could begin.

The judicial community and the media have taken a month to become aware of the implications that overturn past case law establishing the primacy of the Committee of Creditors (CoC) composed of secured financial creditors. A request for review can be filed to clarify matters; but since Vidarbha Industries is part of the Anil Dhirubhai Ambani Group (ADAG), the reaction from the legal community may be mixed.

At the same time, the government must examine and address the problem, if any, of private infrastructure companies, such as Vidarbha Industries, which claimed that the default was due to ongoing litigation that blocked its ability to payment. This takes us into trickier ground and opens the doors to a new round of contrived disputes (over pricing, cost overruns, quality, etc.) that would derail bankruptcy law for businesses anyway. ‘infrastructure.

Let’s not forget that much of the delay in resolving the failure of Infrastructure Leasing & Financial Services (IL&FS) is due to claims and counterclaims from different classes of creditors which remained unresolved in all cases. where a controlling shareholder is not available to take over a special purpose vehicle (SPV). The same goes for the real estate sector, where the Supreme Court has repeatedly come to the aid of first-time buyers. It was only in June 2022 that the Indian Board of Insolvency and Bankruptcy (IBBI) solicited suggestions to address these issues and ensure speedy resolution of the real estate projects.

Corruption and redress

This Vidarbha order is just the latest in a series of blows to the credibility of the bankruptcy process. Allegations of rampant corruption and rigging, which have stymied this legislation, have never been addressed, despite Prime Minister (PM) Narendra Modi’s promise to crack down on corruption in 2014. More than a year ago, the industrialist Harsh Goenka tagged @PMOIndia and tweeted: ‘Developers putting money aside, taking company to cleaners, getting 80-90% haircuts from bankers/NCLT – this is the new game in town. Lots of institutions cleaned up by the government – NCLT then please @PMOIndia. We cannot have our hard-earned public money stolen! This was when bankers were happy to accept haircuts of 90% or more, which had led to public outrage. The media had hinted that the government was planning a revision of the insolvency code. Nothing happened.

There are only two reported cases of intervention by the Central Bureau of Investigation (CBI) for corruption. The first was in January 2020, when an Interim Resolution Professional (IRP) was arrested for receiving a bribe of Rs 3.5 lakh by threatening to file a criminal complaint against someone. The next was in April 2022 when the CBI set a trap for an IRP arrested in Pune for demanding Rs20 lakh from a company to ensure there was no enforcement action against it.

However, on August 11, AND Prime published a bombshell report on a Rs 1,000 crore cash-for-orders scam where a resolution (PR) professional alleged that a recently retired technical member of NCLT, Chennai, had delivered crucial orders in favor of the highest bidder. He called for a CBI investigation into these allegations.

The report says that PRs and even chartered accountants have filed numerous complaints with the government; but, instead of ordering a detailed investigation, the authorities ask them to provide evidence to support their accusations. Meanwhile, endemic corruption and collusion between lenders and bankrupt companies with complicit PRs is an open fact. The draconian nature of the law, which was intended to ensure rapid resolution, left many operational creditors with valid claims (owners, depositors and contractors of infrastructure projects) in the lurch. These remain unanswered.

Let’s not forget that corporate defaults only accumulate after years of collusion between banks and borrowers, when banks turn a blind eye to embezzlement and constantly greening accounts. Bankruptcy law now allows the same secured lenders to close these loans with mass write-offs or buy them at a low price through a seemingly independent front entity.

Vacancy and competence

While corruption has remained intact, the resolution effort is further impacted by a shortage of judicial and technical members. Moneylife reported recently that nearly 50% or 30 of the 63 sanctioned positions for NCLT members are vacant. Actions to fill these vacancies are slow and sporadic. There is the curious circular saying that the NCLT decided to only hear urgent cases by videoconference which was hastily withdrawn as if to avoid public acknowledgment of a real problem.

The problem is not just about vacancies – the quality of appointees to the NCLT, as evidenced by some of the orders issued, is often a greater embarrassment. This has not been addressed for the past six years. Previously, the government did not extend the terms of NCLT members who had complaints against them, but the next round of appointments will have a mandatory five-year term with the risk of bad appointments doing much more damage.

Since many NCLT members do not have the requisite knowledge of business, accounting, finance, or law, we hear that law firms prepare orders, which are typed and issued without any changes. Some PRs insist that unless the government works to create a dedicated cadre of professionals under the IBBI, the outcomes of resolution processes will remain haphazard and uneven.

At the start of the law, many capable bankers with long experience were keen to participate in the resolution process because they believed that a powerful new law, which was overseen and controlled by the Prime Minister himself, would help revive or turn around many businesses under new management. In less than a year, it was clear that the focus was on six of the seven major defaulters. These remain the great centerpieces on which the effectiveness of the law continues to be boasted. The reality is that bankruptcy law needs to be changed and fixed quickly because it is already falling into oblivion like a dozen previous laws that were passed with the laudable aim of reviving ailing businesses.

Earlier this month it was reported that the government was indeed planning to amend and strengthen the IBC and reduce delays. But new orders and new challenges seem to be surfacing faster than the proposed reform. In any case, amendments to a law with serious consequences, such as the bankruptcy code, should not be made stealthily or in haste. This requires broader discussion and global action, otherwise we will end up with patchy patches.

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