Even Creditors Do Not Hesitate To Game the Bankruptcy Law: Mercator Petroleum Could Be a Case Study
Professionals dealing with the resolution process under the Insolvency and Bankruptcy Code (IBC) narrate innumerable malpractices, but usually do not want to be named, since they would be replaced and, later, ostracised by banks who invariably act in concert as secured lenders. They report cases where post-default rights and guarantees are created in favour some unsecured creditors in order to dilute the rights of secured creditors on the committee of creditors (COC). The convention is that the lender with the highest dues calls the shots. After the Supreme Court (SC) gave primacy to ‘commercial judgement’ of the COC in resolution matters, having a dominant role on the COC empowers 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 a nominal Rs100 stamp paper, which is in violation of the Indian Stamp Act. SC reiterated this in the Essar Steel judgement of 15 November 2019, disallowing the admission of insufficiently-stamped documents. In many bankruptcy cases, pliant resolution professionals (RPs) accept such documents allowing lenders to manipulate claims. RPs and lawyers claim that such skulduggery, often, has the tacit approval secured lenders.
A second trick is to claim extortionate interest on unsecured short-term loans which is actually disallowed. The national company law appellate tribunal (NCLAT), in a case pertaining to Shinhan Bank and Sungil Pvt Ltd [Company Appeal(AT)(Insolvency) No. 912-913 of 2019], termed as extortionate, interest rates varying from 3.3% to 5% per month, charged to the defaulter after failing to meet the payment deadlines. Such extortionate credit transactions are prohibited under Section 50(1) of IBC, 2016, and were set aside as illegal and void.
A third trick is to inflate claims by charging penal interest or ‘interest on interest’ for the period 1 March 2020 to 31 March 2020 when there was a nationwide lock-down for COVID, leading to a clear ruling by SC to disallow it.
Yet another trick is to induce a pliant RP to provide a clean chit in writing to absolve malpractices and activities such as diversion and misappropriation of funds. This, again, happens in collusion with secured creditors who turn a blind eye. The upshot of such dubious actions is the growing number of cases where lenders have written off between 80%-97% of outstanding dues from corporate defaulters. Such write-offs are eventually covered with public money doled out by the exchequer in the form of repeated bank bailouts. 
Most of these issues remain hidden from the public because they are collusive actions and RPs who object are ostracised by the lending community. In the circumstances, the insolvency proceedings of Mercator Petroleum Limited (MPL), which started in 31August 2020, stand out because the RP, in this case, has made a series of extraordinary allegations in writing to the board of UTI Capital Ltd which is a lead lender as well as a potential investor, post-restructuring. UTI Capital is a subsidiary of UTI AMC and is the investment manager for UTI’s alternate investment fund (AIF).
The letter dated 27 October 2022, by Satish Kumar Gupta, the RP handling this insolvency, is also copied to Axis Trustee Company, chairpersons of the Securities and Exchange Board of India (SEBI) and IBC, and secretaries of the ministries of finance and corporate affairs. It must be mentioned that UTI Capital had tried to remove the RP and replace him with one Amit Rastogi.
Interestingly, Bank of Baroda (BOB), which accounts for over 31% of the outstanding dues, has filed proceedings before the NCLT against the two UTI Structured Debt Opportunities Funds alleging misuse of their majority position in the COC on the claim of being owed 68% of the dues (an inflated claim as per the RP). BOB has also objected to the removal of the RP, Satish Gupta, saying that UTI Capital wants him replaced since the RP’s actions, while being procedurally correct, are not in UTI Capital’s interest. In multiple proceedings filed by BOB and Halliburton Offshore Services Ltd against MPL, there are allegations about UTI Capital not having provided information to other creditors about recoveries. Some of these are detailed in the RP’s letter. (We have accessed the documents and proceedings filed by BOB in this regard). I reached out to UTI Capital for its response. It categorically denied the allegations, its brief response is at the end of the column.
About MPL’s Insolvency 
MPL is a fully-owned subsidiary of Mercator Limited which was India’s second largest private ship-owner and also undergoing insolvency proceedings with some inter-related transactions with the subsidiary. MPL was into petroleum exploration and production (E&P) in India and abroad.
The RP, Mr Gupta, has charged UTI Capital with inflating the money due from MPL through dodgy means and failing to submit statement of accounts 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 31st March to 31 August 2020. This amounts to monthly interest charge of 4.22% or a whopping 50.68% on annual basis.
  • UTI Capital’s claim is apparently based on a corporate guarantee issued by MPL against non-convertible debentures (NCD) issued by the parent Mercator Ltd. The NCDs had a coupon of 12%pa, with an ‘extortionate’ penal interest of 2.5%pm (per month), compounded monthly, which works out to 34.48%p.a. The RP provides details to show that the norm for penal interest charged is about 2%pa. It is not charged on a monthly basis and ‘by no stretch’ can be as high as 2.5% compounded monthly. He cites the SC decision in Central Bank of India vs Ravindra and Ors [AIR 2001 SC 3095] about how such a high penal interest violates Indian law. The judgement notes, “Penal interest can be charged only once for one period of default and therefore cannot be permitted to be capitalised,” as opposed to the liability to pay interest which is founded on the doctrine of compensation.
  • The RP alleges that UTI Capital has not provided a statement of accounts, while its working file for ‘part period of dues’ indicates capitalisation/compounding of penal interest which is violative of the principle enunciated by SC.
  • UTI Capital, he says, also charged penal interest during the COVID lock-down period of 1 March 2020 to 31 December 2020, where SC has ruled that no interest can be charged. 
  • Another SC order (State Tax Officer (1) V/s Rainbow Papers Limited) is cited by the RP to make the point that that the COC cannot “secure its own dues at the cost of statutory dues owed to any Government or Governmental Authority.” In such a case, the company “would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.” The RP’s contention is that MPL has money owed to the directorate of hydrocarbons under the petroleum ministry and this order would apply to it.
  • He goes on to flag issues pertaining to MPL’s parent Mercator to allege inaccurate disclosure of the exact amount outstanding to UTI Capital. Mercator Ltd had paid Rs10.17 crore to UTI Capital on 20 July 2021, to reduce its outstanding dues which was, allegedly, concealed from all creditors. This issue has also been raised by BOB before NCLT.
  • Next, Mercator’s statutory disclosure to stock exchanges on 13 December 2019 said it owed Rs195.89 crore to UTI Capital, of which Rs126.45 crore was the principal outstanding. A subsequent disclosure showed that, on 31 March 2020, it owed Rs199.45 crore to UTI Capital. However, UTI Capital claimed higher outstanding dues of Rs212.88 crore, based on an email by an assistant general manager of Mercator Ltd dated 23 April 2020. The RP asks how can an email have greater sanctity than a statutory disclosure to stock exchanges confirmed by the board of directors? UTI Capital’s inflated claims were made as recently as 14 October 2022 giving it greater clout on the COC.
  • Stock exchange disclosures by Mercator have a different date of default from that claimed by UTI Capital. The latter claimed 4 October 2018 as the default date and went on to inflate outstanding by charging an extortionate penal interest of 2.5% per month, compounded monthly from that date! Axis Trustee Company, alleges the trustee, accepted this and sent out a notice of default to Mercator (on 1 October 2020) without any explanation about why penal interest is charged backdated with effect from 4 October 2018, or why it had invoked the event of default before the expiry of 330 days without verifying all facts and circumstances.
In view of the litany of charges about inflated claims, the RP sought a consolidated list of submissions to the auditor, statement of accounts and clarification of claims with supporting documents on 19 October 2022. UTI Capital’s reply on 25 October offered a letter from its lawyers instead of valid proof, especially expenses of Rs2.92 crore and whether dues and penal interest had been booked as income and tax paid on it, as well as the seven-month delay in invoking the event of default.
UTI Capital’s Post-restructuring Interest
Now comes the interesting part. The RP points out that UTI Capital, with a lead role in the COC, needs to be all the more transparent because it is also a prospective resolution applicant (PRA) for MPL. Hence, it must ensure there is no allegation of fraud or misuse of its majority position on the COC. In summary, he seeks clarity, with proof, on the following charges: the exact date of default; the extortionate interest charged; concealment of amount received from Mercator; and inflating claims to “gain unjust advantage of more than 66% majority voting rights in the COC of MPL.”
He contends that if UTI Capital acquires MPL on such inflated claims, it will be at the cost of other public sector creditors, while dues of operational creditors, including the government’s department of hydrocarbons, will be written off. 
UTI Capital had denied these claims but documents posted below show that multiple petitions have already been filed before NCLT by BOB as well. The allegations themselves are serious enough for regulators and ministries copied by the RP to conduct a full investigation and look at MPL as a case study of what is wrong with the bankruptcy process and initiate urgent action. After all, most of the money written off belongs to the public sector banks and, hence, the people of India.
UTI Capital’s response was as follows: “The letter (by RP Mr Gupta) dated 27.10.2022 is in fact a reaction by the RP to an interlocutory application dated 25.10.2022 filed by us in NCLT Mumbai requesting, inter alia, an IBBI investigation against the conduct of the RP. The letter dated 27.10.2022, along with other similar letters written by the RP, have also been brought by us to the attention of the NCLT and IBBI by an affidavit dated 03.11.2022.
The fact of course is very different than portrayed in the letter”.
Attached below are documents from Bank of Baroda’s filings before NCLT.
1. BOB petition raising several contentious issues highlighted above. (Screenshop of the first page only)
2. BoB letter questioning UTI Capital’s claims.
3. BoB letter to UTI Capital on valuation and the removal of RP
1 year ago
'It's like pot calling the kettle black.' Once the claim is admitted, it must be frozen on the date of admission. Second, the settlement must be sooner than later and not wait for the statutory period to run fully.
Kamal Garg
1 year ago
Absolutely horrible. Who will "police" the Police?
1 year ago
Shocking. But doesn't surprise.

"Commercial wisdom" of CoC is treated just & fair simply because it garners 66% or more votes. This needs to change immediately. There has to be fairness opinion on the fairness & justness of the CoC decision.

To create the facade of so-called "commercial wisdom", such manipulations will continue for grabbing 66% or more votes.

Punishments for claim manipulations should be stringent so that the claimants are mortally scared. Yet some cowboys will shoot from the hip. To prevent this, the claim calculations and documents should be shared with all the creditors so that the aggrieved parties can seek correction. This will rein in the cowboys.

We are tired of finding such loot by paying heavy taxes - direct and indirect.

Last but not the least, NCLTs need to be massively strengthened so that they can dispose of the matters so fast that the petition-jeevis are thoroughly disincentivised.
1 year ago
I am one of the NCD claimant in Neesa Liesure LTD which went bankrupt and matter is referred to IBC Ahemdabad bench.One person got list of FD holder's and asked FD holder's to submit claim through him by fees of ?500 for ?50000 & ?1000 per claim above 50000.The matter is four years old and faith of unsecured FD holder's is without any result.Now as the matter is delayed FD holder's are in doubt about recovery of claim fees paid leave aside original claim.The matter is 9 year old.Anybhopes.
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