Shady deals at companies going bust? A concerted clawback effort is on the way
Companies entering bankruptcy have often been found to have involved in questionable deals before the process, and reversing them have remained a headache for bankruptcy administrators. Now, things may be about to change
The Centre is looking to tighten the noose around shady transactions at companies undergoing bankruptcy proceedings committed by previous managements, two people aware of the plans said. The government is working with the Insolvency and Bankruptcy Board of India (IBBI) to find ways to identify and examine such transactions more thoroughly, in an effort to reverse them and recover the money.
The idea is to have a more robust assessment of questionable transactions which fall in the classes of ‘preferential,’ ‘undervalued,’ “fraudulent’ and ‘extortionate,’ so that it forms a strong basis for the government to take action, and for tribunals to reverse them, enabling clawback of assets.
Creditors appoint administrators to supervise businesses undergoing bankruptcy proceedings. These individuals work to identify such avoidance transactions, and approach the National Company Law Tribunal (NCLT) to reverse them under India's bankruptcy code. Recovery from such deals will bring more assets and resources to the table for lenders to work out a revival plan for the company.
“Efforts are on for improving the enforcement outcomes in these transactions, which will aid in the revival of the companies concerned," said one of the persons quoted above.
This comes at a time when recoveries from such transactions remain minuscule. Out of the ₹3.85 trillion that resolution professionals sought to claw back, only a little more than ₹7,900 crore could be recovered, shows IBBI data till the end of FY25. The move is part of discussions around improving the overall institutional capacity of resolution professionals and the debt resolution ecosystem in the country. One of the ideas under consideration is setting protocols to be followed in flagging such transactions by resolution professionals.
IBBI has taken steps to encourage the creditor-appointed administrators of bankrupt businesses to be more proactive in such cases. In July, the bankruptcy regulator mandated them to disclose such transactions in the sale prospectus of the bankrupt business they are overseeing, for more transparency and better price discovery. The regulator said that amounts recovered from avoidable transactions disclosed in the prospectus alone can be included in the corporate turnaround plan.
Experts attributed the low recovery from these transactions to the complexity of proving such cases before the NCLT, rather than any overestimation of amounts.
Establishing the intent, tracing transactions, and gathering admissible evidence are challenging and often prolonged, especially when records are incomplete or promoters not cooperative, said Anisha Jhunjhunwala, senior consultant-IBC at NPV Insolvency Professionals Pvt. Ltd. Even when tribunals rule in favour of recovery, enforcement remains weak as counterparties frequently lack sufficient realizable assets, resulting in limited actual recovery, she said.
“To improve outcomes, the government and IBBI should strengthen inter-agency coordination and streamline forensic procedures to ensure more accurate estimation of avoidance transactions," said Jhunjhunwala. She also said that providing insolvency professionals with better access to financial and transactional data and establishing specialized fast-track benches within NCLT for such cases, would help significantly.
Complexity of cases makes recovery slow, said Moksh Kalyanram Abhiramula, managing partner at La Mintage Legal LLP.
“Insolvency professionals must establish detailed evidence demonstrating the intent, timing, and impact of each transaction, which often involves forensic audits, tracing assets, and contesting elaborate defences raised by respondents. Further complications arise from lengthy legal battles, lack of documentary records, and delays in judicial processes, making actual recoveries difficult compared to filed claims," said Abhiramula.
For better estimation and recovery, the government and IBBI could set robust guidelines for claim quantification, mandate rigorous forensic investigations pre-filing, facilitate better asset tracing technology, and strengthen cross-institutional coordination for enforcement, said Abhiramula.
Experts also said that streamlining NCLT procedures and training insolvency professionals in forensic accounting will help in recovery from these questionable deals.
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