Lenders seek to claw back over 31,000 cr from bankrupt firms' dodgy deals

The number of voidable transactions flagged before tribunals by debt resolution professionals was 1,237 at the end of March, according to data from IBBI. (Mint)
The number of voidable transactions flagged before tribunals by debt resolution professionals was 1,237 at the end of March, according to data from IBBI. (Mint)

Summary

  • The value of such transactions has increased to 3.7 trillion, up from 3.39 trillion at the end of December

NEW DELHI : New Delhi: The administrators of insolvent companies have approached tribunals to reverse questionable pre-bankruptcy transactions of businesses worth over 31,000 crore from 131 cases in the March quarter in an effort to maximise the resources available for restructuring them, official data showed.

With this, the number of such voidable transactions flagged before tribunals by debt resolution professionals has gone up to 1,237 at the end of March, estimated at 3.7 trillion, up from 3.39 trillion at the end of December, according to data from Insolvency and Bankruptcy Board of India (IBBI), the rule maker for the sector. 

These dubious deals executed by the businesses during their period of financial distress just before admission for insolvency proceedings by tribunals, include preferential, under-valued, fraudulent and extortionate transactions.

Also read | Bankruptcy rescues have soared this year. Here is why

The authorities have been encouraging debt resolution professionals to be proactive in moving the tribunals to reverse questionable transactions by the erstwhile management of the sick businesses as any recovery would boost the assets and funds available for restructuring the business.  

However, recovery has been somewhat slow given that decisions taken around distressed firms are often bitterly contested by some of the stakeholders. 

A fractional clawback

Till the end of March, only 6,599 crore, or less than 2% of the amounts flagged by resolution professionals, has been clawed back, raising doubts about inflation of claims and efficiency of recovery. Of this, 280 crore came in the March quarter from 37 petitions disposed of.

Experts pointed out that the huge difference between the clawed back amounts and the claimed amounts could indicate improper or inflated claims by the resolution professionals as these amounts could lure new investors into the bankrupt company in certain situations. 

Besides, infrastructure issues and inadequate bench strength at the National Company Law Tribunal (NCLT) and delaying tactics by respondents could be contributing to low recovery, explained Anjali Jain, partner at law firm Areness.

Also read | For creditors moving bankruptcy courts, 2023 was a great year

Yogendra Aldak, partner at Lakshmikumaran & Sridharan Attorneys said that recovery of 280 crore may seem insignificant against 31,792 crore of total avoidance transactions reported by resolution professionals in the March quarter in 131 cases. 

However, it is pertinent to measure the recoveries against the total amount involved in the applications which have been disposed of and not against that of all the applications filed during the period which also includes pending applications.

Low recovery

In the last quarter, 37 additional applications were disposed of involving 4,393 crore, indicating a recovery rate close to 6% which is, unfortunately, lower than the average of 12.75%—the share of amount recovered so far against the total amount involved in all avoidance applications disposed of so far. 

“This is further indicative of the imminent necessity to establish specialized technical benches for such applications. The speedy disposal of applications for avoidance transactions will surely have a significant positive impact on the recoveries made as well," said Aldak. 

Also read | IBC tale of delay: Speed up insolvency resolution for this reform to shine

Anjali Jain of Areness said that the issue of avoidance transactions needs to be addressed to retain IBC as a master stroke reform. 

“The Adjudicating Authorities can get stricter in their approach and may routinely come up with intense costs or closure of rights on the parties on failure of compliance," added Jain. 

She suggested that regulatory changes regarding fixation of timelines for adjudication of such applications be brought in by IBBI to address the delays, and that additional incentives for resolution professionals be considered.

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