The shameful collusion between creditors and resolution professionals (RPs) to legally hijack valuable corporate assets via the bankruptcy law reaches new lows every day. The most recent case pertains to Hirakud Industrial Works Ltd (Hirakud) which has been thwarted due to the efforts of Hindalco Industries Ltd (Hindalco) and the Hirakud Workers Union after the resolution had been cleared in December 2021.
Sources watching the insolvency process tell us that such shady deal-making happens regularly. The difference this time is that Hindalco, part of the Aditya Birla group, which hopes to bid for Hirakud, exposed the links between the winning bidder and the owners of Hirakud in an appeal filed before the national company law appellate tribunal (NCLAT). Secondly, there was a workers’ union, with staying power and resources, which has been fighting for over 15 years to ensure the payment of substantial dues owed to its workers.
Appeals filed by Hindalco and the union led to NCLAT’s tough order of 9 January 2023 which exposes how the new owners of a Hirakud, in collusion with related entities, began a fraudulent resolution process, based on a non-existent financial loan, to defraud workers of their legitimate dues and also retain the company.(Case Citation: (2023) ibclaw.in 39 NCLAT)
After a detailed hearing, NCLAT set aside the resolution process by declaring it non est, returning the successful bid amount of Rs40 crore. It also imposed a penalty of Rs50 lakh each on Hirakud Industrial Works and the ostensible financial creditor Nandakini Contractors and directed the Insolvency and Bankruptcy Board of India (IBBI) to conduct and complete an investigation into the actions of the RP, Anand Rao Korada, within three months.
Unfortunately, the role of the adjudicating authority (AA) has not come under scrutiny and the fate of the company and the workers’ compensation still remains open. On the positive side, the case exposes exactly how the insolvency process is being brazenly perverted. Here’s how the story of Hirakud unfolded.
Hirakud began operations as part of the Odisha government’s Infrastructure Development Company (IDC). IDC divested its entire holding to three private companies, namely, Varsha Fabrics, Mudrika Commercial and India Finance, who were also supposed to settle the unpaid dues of workers. Since they did not do so, the workers’ union went to court and a tripartite agreement was signed on the directions of the Odisha High Court in June 2006. It required the new owners to pay the pending dues which were crystallised at Rs45.67 crore by a labour court.
The new owners shut the Hirakud factory in 2007 and transferred their holding to one Indo Wagon Ltd, without bothering to pay the workers. The union went back to court. To cut a long story short, the matter dragged on for nearly 15 years, went to the Supreme Court and then back to the Odisha High Court which ordered the labour commissioner to auction Hirakud’s assets and pay the workers’ dues on 8 April 2019.
The sale of a piece of land to the government’s water works department brought in Rs10 crore. Another piece of land to be auctioned was a private railway siding that was already being leased and used by Hindalco which emerged as the sole and successful bidder by offering just Rs15 crore. The union challenged this, since Hindalco was the sole bidder and a re-auction was ordered by the court.
But this did not go through either, because a company called Nandakini Contractors Pvt Ltd began bankruptcy proceedings against Hirakud for ostensibly failing to pay a Rs14.51 lakh loan dating back to March 2016.
Anand Rao Korada was appointed as an interim RP, and later the RP, whose role is now under investigation. In a frantic hurry to rush through the process, he urged for urgent hearings and the request was granted.
In June 2019, AA allowed resolution proceedings to commence without even waiting for Nandakini Contractors to establish its claim with supporting documents. When Hirakud was admitted for resolution by NCLAT (Cuttack), it immediately triggered a series of actions under the law, including a moratorium on assets. This stalled the land auction and payment to workers.
I am not going into details of how every aspect of this case had to be referred to the Supreme Court for directions, except to say that all of it adds to delays and legal costs and the enormous friction of dealing with bankruptcy cases.
What happened next establishes how a crooked RP can manipulate proceedings in cahoots with creditors. Mr Korada, the RP, first refused to provide details of the potential bidders to Hindalco, as required by the law. While they were seeking legal recourse, he approached AA to approve a company called Regus Impex as the successful bidder for Hirakud.
In February 2020, AA had asked Mr Korada to produce details of the financial debts of Hirakud, but he did not bother to do so. It turns out that, barring a couple of emails acknowledgements, Nandakini Contractors does not even have a loan agreement with Hirakud; but this did not bother the RP. There is uncertainty even about the date of default. What is worse, NCLAT later noted that Mr Korada had even signed an affidavit prepared by a director, Sujit Dutta Roy, of Regus Impex, which emerged as the successful bidder, was not a ‘related party’ of Hirakud. The affidavit itself was a lie, since Hindalco established during the hearings that Mr Dutta Roy was also on the board of multiple companies that claimed to be creditors of Hirakud.
Could the RP have failed to notice this in December 2021, when he recommended Regus Impex as the successful bidder for a payment of Rs40 crore? Note that this amount would barely cover the money due to workers.
These swift and shady dealings prompted Hindalco to launch its own investigation. It discovered that that the alleged creditors, who formed the ‘committee of creditors’ (CoC), were all connected/related to Hirakud, the defaulting company under resolution. Hindalco filed an appeal before NCLAT making the following allegations that were backed by its investigation:
1. The constitution of the CoC was illegal since the creditors were ‘related parties’ of Hirakud. It had brought this fact to the attention of the AA during resolution hearings (No. 50/CTB/2020), but it was ‘inexplicably ignored’.
2. Nandakini Contractors could not show any bank statement to prove that Hirakud owed it over Rs14.51 lakh and it also did not participate in the hearings. Hindalco claimed that the resolution process was begun on the basis of a ‘false and imaginary’ loan, since it did not even find mention in Nandakini Contractors’ annual report.
3. Hirakud and Nandakini Contractors’ joint haste in pushing through the resolution smacked of a collusion to defraud workers of their long-pending dues.
4. Although AA had initially asked the RP to ‘file copy of claims received from the financial creditors, proof of debt of each payment’, this was not done.
5. Hindalco’s lawyers submitted charts showing the shareholding status of the members of the CoC and their inter-connectedness through common shareholdings, addresses, emails and common directors to establish how these entities are closely connected with each other and with the holding companies of the corporate debtor and also with Regus Impex, the successful bidder. I am not going into details of those transactions, since they needlessly complicate the larger story. Suffice it to say that these documents were accepted by NCLAT, which noted, “The linkage between the corporate debtor Hirakud and Regus Impex is quite apparent, which has been brought out in the chart submitted by the Appellant HIL (Hindalco) which is included in this judgment.”
NCLAT, in its order, observed that the “nature, involvement and conduct of the companies” led to the inescapable inference that they were acting ‘in concert’ and being guided by someone as part of a “fraudulent project to defraud the creditors” of Hirakud by misusing the spirit and objectives of the bankruptcy law in a manner that “cannot be condoned or overlooked.”
This sordid saga raises several questions.
Will the management of Hirakud, Nandakini Contractors and all the entities that were part of this fraudulent deal get away unscathed?
NCLAT has imposed a penalty of Rs1 crore (jointly) between the first two, as permitted under Section 65, if the Bankruptcy Act is used for fraudulent and malicious initiation of proceedings. Is this a sufficient deterrent?
What about the role of individual directors of Hirakud and the related-party entities? Will criminal action for fraud be initiated against them?
And what about the workers who have still not been paid? Will they have to wage another long battle to claim their pending dues, despite repeatedly approaching the Supreme Court and high court? When do legal battles ever end in India and who bears the costs and potential interest loss on dues that were crystallised over a decade ago?
And, finally, it is all very well for Hindalco to have fought a bruising battle but does it plan to bid for Hirakud and give a fair deal to the workers? This only proves that the bankruptcy law, touted as a path-breaking legislation, is much too flawed and needs urgent tightening.