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Despite lenders initiating the reversal of suspect deals made by companies before being referred to bankruptcy courts, the amount recovered so far remains a small fraction of the value of such dubious transactions, showed official government data.

According to data from the Insolvency and Bankruptcy Board of India (IBBI), only 64 crore has been recovered by resolution professionals by moving tribunals to reverse dubious deals done by companies in the period of their financial distress before formal bankruptcy proceedings began, out of close to 2.3 trillion of questionable transactions done by companies.

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Graphic: Mint

Data showed that the Insolvency and Bankruptcy Code (IBC) offers the tools to reverse dubious transactions by a defaulting management, which lenders and insolvency professionals are exploring, but the recovery rate is yet to pick up. So far, resolution professionals have moved tribunals seeking to reverse questionable deals of companies in 809 instances, which entails a total value of close to 2.3 trillion, of which decisions have been made in the case of 98 transactions involving around 18,100 crore, while only 64 crore have been clawed back, showed the data from IBBI.

Experts said it is a good beginning, but it has a long way to go. Reversing ‘voidable’ or ‘avoidance’ transactions is among several measures that will instil better corporate governance in companies, and quick disposal of the applications is essential for the success of the provisions, according to Yogendra Aldak, partner, Lakshmikumaran & Sridharan Attorneys.

Quick decisions by tribunals on these applications will help in avoiding value erosion of assets of the corporate debtor and in securing the interest of the creditors, he added.

Expeditious disposal of these applications depends on many factors, including expertise and attentiveness of the insolvency resolution professionals hired by lenders in the detection of such transactions and the full bench strength of the adjudicating authority, said Aldak.

Avoidance transaction cases in India are complicated and require time for substantial evidence to be procured by the National Company Law Tribunal (NCLT), and the recovery under these cases has been slow, said Tushar Singh, partner at law firm Cornellia Chambers. NCLT handles cases under the Companies Act and IBC, which leads to the pendency of a large number of cases.

Singh said the average bankruptcy resolution time is around 679 days, more than double the statutory limit of 330 days. Experts attribute the slow progress in dealing with voidable transactions to the lack of clarity from judicial precedents, absence of standard procedures and lack of dedicated tribunal benches.

The government is keen to step up the recovery rate as it improves the resources available to a bankrupt company for restructuring, and improving its chances for a fresh lease of life.

“To improve the recovery rate, we must have a dedicated bench to conduct these matters as per a statutory timeframe. Additionally, the distribution of the amount recovered to creditors, after adjusting for the costs incurred, may incentivize stakeholders. This will help ensure that the goals of IBC, including maximizing the assets of a corporate debtor and providing a time-effective resolution process, are achieved," said Singh. Experts suggested that training the judges and other stakeholders will also help.

Gireesh Chandra Prasad
Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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