Courts Step Up as Legislative Amendments to IBC Remain Elusive
With general elections around the corner, the only hope to clean-up the bankruptcy process, which has been cynically gamed over the past few years, is through occasional judicial orders. These can come about only when aggrieved professionals or stakeholders seek action against questionable decisions and collusive deals of the national company law tribunal (NCLT) officials and resolution professionals (RPs) who wield enormous power under the Act. Two recent cases illustrate the rot in the system and an effort to get the judiciary involved in a partial clean-up of the leaky bankruptcy process.
 
Madras High Court Petition
Last month, the Madras High Court responded to a petition filed by a chartered accountant  and insolvency professional (IP), V Venkata Siva Kumar, by seeking a response from the Union government to charges of corruption at the NCLT’s Chennai bench. Mr Siva Kumar, who appears in person, contends that the country has lost several lakh crores of rupees due to corrupt and collusive decisions. He has sought a ‘monitoring mechanism’ for the work of adjudicating officers, given that large sums of money are at stake in every case. 
 
Even earlier, Mr Siva Kumar had alleged that a specific technical officer of the Chennai bench had assumed full authority over the adjudication process and would decide  matters in favour of ‘the highest bidder’ with negotiations taking place in his chambers without any documentation of their interactions. He had alleged that petitions of select senior counsel were entertained while those of others, particularly juniors, were shouted down and silenced. 
 
Mr Siva Kumar, who has been doggedly recording and highlighting instances of corruption at the NCLT and its appellate body for over two years, has made the ministries of corporate affairs, law and justice as well as the central vigilance commission as respondents. 
 
While it remains to be seen if the Madras high court orders a detailed inquiry, it is important to remember that this is not the first time that NCLT’s presiding officers have failed to meet integrity parameters laid down by the chief justice of India (CJI). 
 
In 2022, the NCLT Bar Association had filed a petition in the Supreme Court, seeking a two-year extension for all presiding officers’ terms. This had prompted a comprehensive report by the ministry of corporate affairs (MCA) to a committee chaired by the CJI, based on inputs from affected litigants and government investigation agencies. The Court went on to establish four parameters for considering extensions of presiding officers: good character, antecedents, work performance and suitability. The outcome was that 15 out of 23 members were disqualified from an extension, but the details of the report submitted to the Court have not been made public. 
 
NCLT Ahmedabad 
A ruling of NCLT’s Ahmedabad bench on 20 February 2024 [Punjab National Bank v/s Alpha (India) Properties Ltd] exposes the shocking manner in which an RP chose to game the very composition of the committee of creditors (CoC). He did this by allowing 20 related entities of a creditor to be included in the COC, giving the group a decisive vote in the resolution decision. 
 
Ranged on one side of this case were three large public sector banks (PSBs) -- Punjab National Bank, Bank of India and United Commercial Bank. On the other, were 20 related entities of Alpha India Properties as well as the RP, Naren Seth. The case pertained to bankruptcy proceedings invoked in the case of KG Corporation in November 2022.
 
Disgracefully enough, the RP chose to ignore facts and data filed with the MCA despite requests by the banks. By doing so, he allowed 20 connected entities, who had submitted claims of Rs1,200 crore, to be falsely introduced at financial creditors giving them a 67.55% vote share in CoC. In the process, the vote share of the three banks was reduced to 32.45% and allowed Alpha India and its related entities to dictate the outcome and approve the resolution plan with a 75.09% majority vote. Under the bankruptcy law, the CoC, comprising secured financial creditors, chooses the winning bidder through a vote. 
 
The banks presented exhaustive data to demonstrate that the 20 entities were related to the corporate debtor and were controlled through a web of 96 companies and 14 entities interconnected with common shareholdings, directors, same registered offices through the Tayal, Yadav and Silvassa groups. It was further alleged that they had come together to ‘commit fraud for unlawful gains’. The bench noted that the RP failed to conduct an independent verification of facts and had also ignored shareholding patterns that were reported on the MCA portal, despite objections from the PSBs.
 
The NCLT, after examining the definition of related parties and legal precedents involving lifting the corporate veil, accepted that all but two of the 20 were related parties of the corporate debtor and had no right of representation or participation in CoC meeting. It also scrapped the earlier decision and ordered the CoC to be reconstituted in 15 days. The RP has also been barred from being involved in the resolution process. 
 
The order is significant for two reasons. First, that an RP under the Act dares to collude with a corporate debtor and game the system so brazenly, even when objections are raised by three very large and powerful PSBs. The second significant point is that, despite such egregious findings, the NCLT has allowed the tainted RP to get away unscathed, except to abstain in this particular case. At the very least, the NCLT ought to have ordered an investigation into his actions and this track record. Instead, the worst that will happen is that he will be replaced by the re-constituted CoC and could go on to repeat his mischief in other resolution cases. 
 
The Chennai and Ahmedabad cases highlight how the bankruptcy law has handed immense powers to RPs and presiding officers without proper oversight or consequences, barring sporadic action by the central bureau of investigation (CBI). As far back as in January 2020, the CBI had arrested an RP for accepting a Rs3.5 lakh bribe. In April 2022, that same agency arrested another RP for demanding Rs20 lakh. These rare instances are hardly a deterrent to corrupt professionals whose actions allow massive loans, mainly by government-owned banks, to be written off. 
 
A fortnight ago, I wrote about how the white paper presented by finance minister (FM) Nirmala Sitharaman had selectively listed 15 scams between 2004 and 2014, with many curious inclusions and omissions (Read: Scams Listed in the NDA White Paper, Their Outcome and Beyond). Surely, the loss to the nation due to corruption in the bankruptcy process, and the failure to bring to justice absconding corporate defaulters, such as Nirav Modi, Vijay Mallya, Jatin Mehta (of Suraj Diamond) and the Sandesaras (of Sterling Biotech) over the past 10 years surely deserves its own white paper.  
 
 
 
Comments
Kamal Garg
1 month ago
Nothing new here. Everybody including RP and CoC game the system as they know the intricacies of the working.
iaminprabhu
2 months ago
SHOCKING the way how CORRUPTION & doing anything for money, has crept into the Social fabric on many activities!

Even the people supposed to do Due Diligence & render JUSTICE are blatantly falling down to corruption & colluding with looters!
vaibhavdhoka
2 months ago
In Niesa Leisure Ltd,FD holders are taken for ride as they have low represent ion.Seven years passed with no order in sight.Even cost for representation is doubtful recovery.
ppindia18
Replied to vaibhavdhoka comment 1 month ago
FD is considered unsecured creditors, just above share holders in hierarchy of creditors, so dont expect any money back, you will only get something if the buyers pays more than the sum of all the total credit, which is very very rare.
rmganatra
2 months ago
Sad state of affairs. Ahmedabad and Chennai instances are reflective of a serious disorder and highlight the need for overhaul of IBC. Recent video of spat between the judicial and technical members of Chandigarh NCLT also indicates serious rot in the system. Apart from this the extraordinarily tardy adjudication is imposing huge cost on the country. I hope the government will take urgent action to fix this malaise!
ramaninv1953
2 months ago
These days ,Fraudsters/Fugitives ,Scamsters etc continue to game the System. There are vacancies of Judicial officers to be filled in all over the country. Very sad state of affairs.
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