Professionals dealing with the resolution process under the Insolvency and Bankruptcy Code (IBC) tell of countless malpractices, but generally do not want to be named because they would be replaced and later ostracized by the banks who invariably act together as secured lenders. They report cases where post-default rights and guarantees are created in favor of certain unsecured creditors in order to dilute the rights of secured creditors in the creditors’ committee (COC). The convention is that the lender with the highest dues calls the shots. After the Supreme Court (SC) gave COC “business judgment” primacy in resolution matters, having a dominant role in the COC allows a lender to dictate decisions.
To achieve this, creditors use various tricks to inflate claims. One is to backdate documents such as agreements/guarantees, often on 100 rupees nominal stamp paper, which is in violation of the Indian Stamp Act. SC reiterated this in the Essar Steel judgment of November 15, 2019, refusing the admission of insufficiently stamped documents. In many bankruptcy cases, Soft Resolution (RP) professionals accept such documents allowing lenders to manipulate claims. PRs and lawyers say such shenanigans often have the tacit approval of secured lenders.
A second trick is to charge exorbitant interest on short-term unsecured loans, which is actually prohibited. The National Company Law Appeal Tribunal (NCLAT), in a case concerning Shinhan Bank and Sungil Pvt Ltd [Company Appeal(AT)(Insolvency) No. 912-913 of 2019], described as exorbitant, interest rates ranging from 3.3% to 5% per month, charged to the defaulter after failing to meet payment deadlines. Such extortionate credit transactions are prohibited under Section 50(1) of the IBC, 2016, and have been struck down as unlawful and void.
A third trick is to inflate claims by charging penalty interest or “interest on interest” for the period from March 1, 2020 to March 31, 2020, when there was a national COVID lockdown, leading to a clear decision of SC to ban it.
Yet another trick is to entice a docile PR to provide a clear voucher in writing to absolve malfeasance and activities such as embezzlement and embezzlement. This, again, is happening in collusion with condoning secured creditors. The result of these questionable actions is the growing number of cases where lenders have written off between 80% and 97% of defaulting companies’ unpaid dues. These write-offs are eventually covered by public money distributed by the Treasury in the form of repeated bank bailouts.
Most of these issues remain hidden from the public as they are collusive actions and PRs who oppose them are ostracized by the lending community. In these circumstances, Mercator Petroleum Limited’s (MPL) insolvency proceedings, which commenced on August 31, 2020, stand out as the PR in this case made a series of extraordinary allegations in writing to the Board of Directors. of UTI Capital Ltd which is a main lender as well as a potential investor, after the restructuring. UTI Capital is a subsidiary of UTI AMC and is the investment manager of UTI’s Alternative Investment Fund (AIF).
Interestingly, the Bank of Baroda (BOB), which accounts for over 31% of the contribution arrears, has brought proceedings before the NCLT against the two UTI Structured Debt Opportunities Funds alleging abuse of their majority position within of the COC on the claim to be owed 68% of the dues (an inflated claim according to the RP). BOB also opposed the removal of RP Satish Gupta, saying UTI Capital wants him replaced since the RP’s actions, while procedurally correct, are not in UTI’s interest. Capital. In several proceedings filed by BOB and Halliburton Offshore Services Ltd against MPL, there are allegations that UTI Capital failed to provide information to other creditors about collections. Some of them are detailed in the PR letter. (We have consulted the documents and procedures filed by BOB in this regard). I contacted UTI Capital for their response. He categorically denied the allegations, his brief response is at the end of the column.
About the insolvency of MPL
MPL is a wholly owned subsidiary of Mercator Limited, which was India’s second largest private shipowner and was also subject to insolvency proceedings with certain interrelated transactions with the subsidiary. MPL was in petroleum exploration and production (E&P) in India and overseas.
The RP, Mr. Gupta, accused UTI Capital of inflating the sums owed by MPL through dubious means and of failing to submit account statements and other official documents, despite repeated requests.
According to Mr. Gupta:
- UTI Capital’s dues “increased exorbitantly” from Rs212.88 crore to Rs257.84 crore in the five-month period from March 31 to August 31, 2020. This equates to a monthly interest charge of 4.22% or a whopping 50.68% on an annual basis.
- UTI Capital’s claim is apparently based on a corporate guarantee issued by MPL against non-convertible debentures (NCDs) issued by parent company Mercator Ltd. per month), compounded monthly, which equals 34.48% per annum. The RP provides details to show that the standard for penalty interest charged is around 2% per annum. It is not charged on a monthly basis and “without any extension” can reach 2.5% compounded monthly. He cites the decision of the SC in Central Bank of India versus Ravindra and Ors [AIR 2001 SC 3095] on how such a high penal interest violates Indian law. The judgment notes that “penalty interest can only be charged once for a period of default and therefore cannot be capitalized”, as opposed to the liability to pay interest which is based on the indemnity doctrine. .
- The PR alleges that UTI Capital failed to provide a statement of accounts, while its working file for the “partial period of contribution” indicates a capitalization/composition of penal interests which is contrary to the principle stated by SC.
- UTI Capital, he says, also charged penalty interest during the COVID lockdown period from March 1, 2020 to December 31, 2020, where SC decided no interest could be charged.
- Another SC Ordinance (State Tax Officer (1) Versus Rainbow Papers Limited) is cited by the RP to argue that the COC cannot “guarantee its own dues at the price of statutory dues due to any government or governmental authority”. In such an event, the company “should necessarily be liquidated and its assets sold and distributed in the manner provided in Section 53 of the IBC”. The PR’s assertion is that MPL has money owed to the Petroleum Department’s Hydrocarbons Directorate and that this order would apply to it.
- He goes on to point to issues with MPL’s parent company, Mercator, to allege inaccurate disclosure of the exact amount outstanding to UTI Capital. Mercator Ltd had paid Rs 10.17 crore to UTI Capital on July 20, 2021, to reduce its arrears which would have been hidden from all creditors. This issue was also raised by BOB before NCLT.
- Then Mercator’s statutory disclosure to stock exchanges on December 13, 2019 stated that it owed Rs 195.89 crore to UTI Capital, of which Rs 126.45 crore was the outstanding principal. A later disclosure showed that on March 31, 2020, she owed Rs 199.45 crore to UTI Capital. However, UTI Capital claimed higher unpaid dues of Rs212.88 crore, based on an email from a Deputy Managing Director of Mercator Ltd dated April 23, 2020. The PR asks how an email can have greater sanctity than a statutory disclosure to stock exchanges confirmed by the Board of Trustees? UTI Capital’s inflated claims were made as recently as October 14, 2022, giving it more leverage over the COC.
- Mercator’s stock market statements have a different default date than that claimed by UTI Capital. The latter claimed October 4, 2018 as the date of default and continued to inflate the outstanding amount by charging an exorbitant criminal interest of 2.5% per month, compounded monthly from that date! Axis Trustee Company, the trustee alleges, accepted it and sent a formal notice to Mercator (on October 1, 2020) without any explanation as to why penal interest is applied with retroactive effect to October 4, 2018, or why it had invoked the event of default before the expiration of 330 days without verification of all the facts and circumstances.
Given the litany of accusations regarding inflated claims, the PR requested a consolidated list of submissions to the auditor, statement of accounts and clarification of claims with supporting documentation on October 19, 2022. UTI Capital’s response October 25 offered a letter from his lawyers. in lieu of valid evidence, specifically the expenditure of Rs2.92 crore and whether the dues and penal interest had been accounted for as income and tax paid thereon, and the time limit of seven months to invoke the event of default.
Post-restructuring participation of UTI Capital
Now comes the interesting part. The PR stresses that UTI Capital, which plays a leading role in the COC, must be all the more transparent as it is also a potential resolution requestor (PRA) for MPL. Therefore, he must ensure that there are no allegations of fraud or abuse of his majority position within the COC. In summary, he requests clarification, with proof, on the following charges: the exact date of the defect; the exorbitant interest charged; concealment of the amount received from Mercator; and inflate claims to “gain an unfair advantage of more than 66% majority voting power in MPL’s COC”.
He argues that if UTI Capital acquires MPL on such inflated claims, it will be at the expense of other public sector creditors, while the dues of operational creditors, including the government’s hydrocarbons department, will be written off.
UTI Capital had denied these allegations, but the documents published below show that several petitions have already been filed before NCLT by BOB as well. The allegations themselves are serious enough that regulators and government departments copied by the RP are thoroughly investigating and viewing MPL as a case study in what is wrong with the bankruptcy process and taking urgent action. After all, most of the money written off belongs to the public sector banks and therefore to the people of India.
UTI Capital’s response was as follows: “The letter (from RP Mr Gupta) dated 27.10.2022 is actually a response from the RP to an interlocutory request dated 25.10.2022 filed by us at NCLT Mumbai requesting, among other things, an IBBI investigation into the conduct of the RP . The letter dated 27.10.2022, and other similar letters written by the RP, were also brought to the attention of the NCLT and IBBI by us through an affidavit dated 03.11.2022.
The fact is of course very different from that described in the letter.”
Below are documents from Bank of Baroda’s filings with NCLT.
1. BOB petition raising several contentious issues highlighted above. (Front page screenshop only)
2. BoB letter questioning UTI Capital’s claims.
3. BoB letter to UTI Capital on RP valuation and removal