Dodgy deals facing greater RP scrutiny

NEW DELHI : Bankruptcy resolution professionals (RPs) have stepped up scrutiny of suspect transactions made before bankruptcy filings, moving tribunals to reverse transactions totalling 23,700 crore in the September quarter alone.

While 24 such questionable transactions—called voidable or avoidance transactions—were flagged to tribunals in the March quarter, it was followed by 76 and 78 in the June and September quarters. The amounts involved rose as well, from 2,475 crore in the March quarter to 10,220 in the June quarter and to 23,708 crore in the September quarter, data from bankruptcy rule maker Insolvency and Bankruptcy Board of India (IBBI) showed.

RPs suspect these transactions to be fraudulent, preferential or undervalued. The increased filings show lenders are keen to recover any inappropriately alienated assets that could add to the pool of resources available for resolution under the Insolvency and Bankruptcy Code (IBC). Scrutiny of company affairs in the period of financial distress leading to payment defaults also points to their concerns that the management and major shareholders may have taken decisions in that period that may not be in the interest of the creditors.

Experts said legal clarity on certain issues has encouraged lenders and RPs. The National Company Law Appellate Tribunal (NCLAT) has held that a transaction audit report is not absolutely necessary to file an application under an IBC section that allows tribunals to direct those involved in fraud to contribute to the assets of the bankrupt business. Also, a division bench of the Delhi high court has allowed for the continuation of avoidance application even after the approval of resolution plan, explained Yogendra Aldak, partner at law firm Lakshmikumaran & Sridharan Attorneys.

“These trends have contributed significantly in enabling RPs to question and challenge a wide array of transactions. Additionally, even the stakeholders are increasingly aware of their rights due to the clarity brought about by the evolving jurisprudence on the provisions of the IBC,” said Aldak.

At the end of September quarter, the total amount involved in 1,025 such suspicious deals reported to tribunals stood at around 3.2 trillion. However, recovery of amounts from these transactions does not seem to have kept pace. So far, only 200 cases involving an amount of 44,892 crore have been disposed of by the tribunals. The amount clawed back in these cases is a modest 5,230 crores, reflecting the litigious nature of the process.

The government is now in the process of stepping up the capacity of tribunals by filling vacancies to speed up the judicial process. This year, the authorities expect around 300 corporate turnarounds under the IBC, up from 180 last fiscal year. Given that around 180,000 new companies are incorporated and around 5,000 bankruptcy cases are initiated in a year, the government wants to have the capacity to resolve around 1,000 insolvency cases in a year. Many cases get settled or withdrawn before the bankruptcy petitions get admitted in tribunals.

Aldak said certain issues of interpretation of the IBC had earlier created bottlenecks, for example, in the case of loans guaranteed by personal guarantors.

“It is only recently that the Supreme Court has provided clarity regarding proceedings against personal guarantors and thus realization from these should substantially add to the overall recovery amounts,” said Aldak.

Earlier this month, the apex court upheld the IBC provisions on personal guarantors, giving a leg-up to creditors pursuing them.

Having an efficient corporate turnaround ecosystem is a priority for the Narendra Modi administration.

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Updated: 14 Nov 2023, 11:01 PM IST

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