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India’s bankruptcy resolution professionals are under siege

With mounting instances of harassment of resolution professionals, all eyes are on the Insolvency and Bankruptcy Board of India (IBBI), which acts as the regulator for insolvency professionals.Premium
With mounting instances of harassment of resolution professionals, all eyes are on the Insolvency and Bankruptcy Board of India (IBBI), which acts as the regulator for insolvency professionals.

  • A rise in cases of intimidation threatens to derail the bankruptcy process in India. What can be done?
  • The alleged wrongful arrest and subsequent release of a resolution professional at the intervention of the Supreme Court has heightened calls for urgent reform

MUMBAI : He was at his sister’s house in Mumbai when policemen from Uttar Pradesh came knocking last month. Anuj Jain, the man in charge of managing the bankruptcy resolution of Jaypee Infratech Ltd, was arrested over fears that he might flee the country. In reality, he was in the financial capital to attend meetings at a large state-owned bank and had stayed back for a few days.

What followed was a nightmare—recalcitrant law enforcement officials, a surveillance operation gone wrong and a general lack of awareness about the protection guaranteed to resolution professionals (RPs) under India’s Insolvency and Bankruptcy Code (IBC). RPs are in charge of turning around stressed companies; they run the asset attached to the corporate debtor during the resolution period.

Jain was under surveillance since a police complaint was filed against him for not upgrading safety measures on the Yamuna Expressway, leading to deaths. However, the police misconstrued his pre-decided flight to Mumbai as a flight from prosecution. So, Jain—appointed by none other than India’s apex court—was arrested and taken to Uttar Pradesh.

Thankfully for Jain, the Supreme Court heard his plea and released him from custody on 2 March. The court was visibly unhappy with the whole episode and sought an explanation from the police.

According to a person close to Jain who spoke on condition of anonymity, he was in the process of getting road barriers installed to curb accidents on the 165-km Yamuna Expressway that connects New Delhi with Agra. There was, of course, some amount of delay because no one responded to multiple advertisements seeking expressions of interest. Then, an accident occurred, and a first information report (FIR) was registered against Jain alleging dereliction of duties.

In fact, Jain’s friend said he was in the process of awarding the tender when all of this happened. “He was not allowed the three mandatory days to respond to the FIR," said Jain’s friend quoted earlier.

Surprisingly, even after the SC’s order, some of Jain’s friends had to go to the lower court in Greater Noida to prevent him from being sent to police custody. According to Jain’s friend, despite showing the court order available on the SC website, the local judge kept insisting on a certified copy and left the premises. The judge had to be called back to rescind his earlier order once the SC emailed its order to the lower court.

Jain did not respond to a message seeking his comments on the ordeal. But this case should not be viewed in isolation.

RPs face a peculiar set of problems. As no promoter wants to let go of his/her company, the resolution professional is seen as an outsider trying to grab control. That leads to non-cooperation and even harassment in some cases.

As of 30 September, there were 3,182 insolvency professionals who have passed a specific test and got themselves registered to act as turnaround specialists. Despite being appointed by a tribunal, these professionals are often left at the mercy of frivolous intimidation tactics by irked workers of the company whose debt is being resolved or, as seen in a recent case, by uniformed policemen.

According to lawyers, at times, the harassment reaches a level where tackling that becomes a priority and not turning around a stressed company, the original role envisaged in the IBC.

“A lot of intimidation is faced by resolution professionals not only from corporate debtors or authorities but also from employees, workers, creditors and in some remote areas even from locals as well. It is really difficult to steer the process in such an environment," says Ashish Pyasi, associate partner at law firm Dhir & Dhir Associates.

Pyasi says problems faced by the resolution professionals include threats of assault, allegations, complaints, litigations pursued by different stakeholders. To be sure, these are in addition to the regular problems that crop up in the process of resolving the stressed debt.

Legal disconnect

Experts believe that the primary reason for insolvency resolution professionals being harassed is because of a disconnect between the tribunal and other courts. Policemen, they said, are quite unaware of the provisions of the company laws, how the National Company Law Tribunal (NCLT) functions and the safeguards given to the RPs. It is important to note that the authority of the tribunals is limited when compared to a trial court.

“The regular judicial forums do not seem to be connected to company forums like the NCLT. There is a disconnect between the tribunals and the trial courts, otherwise the police would have been far more aware of the IP’s responsibilities under the Code. Since the police do not report to Tribunals in proceedings and have to go and stand in front of the district and session courts, they are less accountable for their inappropriate actions in such matters." said Vivek Parti, a New Delhi-based insolvency resolution professional.

Parti, also the co-author of HandBook On The Insolvency Resolution Process, says that this disconnect between tribunals and trial courts also results in resolution delays. Insolvency cases where there are money laundering or fraud allegations against the promoters have to be tried separately. According to Parti, in such cases, this results in delays and lower resolution amounts.

Pyasi of Dhir & Dhir Associates agrees. He too believes that while the court and the judicial system are very old, tribunals are new and the authority under the new law is still not known to many. “Sensitization will be the correct approach, right from lower level to higher ups," says Pyasi.

Finally, Faisal Sherwani, partner at law firm L&L Partners, feels that a vast majority of police officers have a genuine belief that it is kosher to go after company officials even for the most minor supposed offenses. He believes that this stems from an insatiable urge to hold “someone accountable". “It is a stark reminder that there is a need to train and sensitise not only the investigative agencies, but also ground-level officers as to what the IBC provisions are," he said.

“There have been instances in the past as well but this example of Anuj (Jain) is an extreme case of the lack of application of mind," he added.

Cases aplenty

The plight of Tamil Nadu-based Bhatia Coke and Energy Ltd’s RP is another recent example. Subrata Monindranath Maity, the resolution professional, approached the NCLT citing harassment and the case was heard in January this year. Maity alleged that erstwhile directors of the company filed police complaints against him in Madhya Pradesh and Tamil Nadu. Also, he told the tribunal that the team assisting him in the resolution and their families were threatened by these former directors. Eventually, the tribunal ordered police protection for Maity, his team and their families.

Earlier, in November 2019, Ranjeet Kumar Verma, who was appointed as the resolution professional for Delhi-based developer Homes Connect Developer Pvt Ltd, met with an accident. He alleged that the accident occurred soon after he was threatened by an executive of the company, according to a Times of India report on 18 December.

Another memorable case that brought to the fore the bullying of RPs was Rolex Cycles Pvt Ltd in 2017, when the resolution professional appealed to the NCLT for assistance. Some fascinating details emerged from the tribunal’s order dated 8 September 2017.

After the company was admitted for insolvency proceedings, Anil Kumar, the resolution professional, had visited the company’s factory to take charge on 21 July and wanted to meet employees, workers and managers to inform them about the change in management.

Kumar also sought access to the books of accounts, the user-ID and password to accounting and business software that the company used. His requests were denied. The premises were characterized by the complete lack of any machinery, spare parts, tool kit, raw material or even finished goods except for the structure of the factory and iron pillars supporting it.

Kumar then deputed someone to lock the factory premises, but faced stiff resistance from existing security guards. That is not all, though. A few days later, he received a phone call from a person claiming to be a police official from Ludhiana saying that a complaint has been lodged against him.

These cases showed how a mix of police complaints and non-cooperation was used to deter a tribunal-appointed professional from commencing the resolution process. In fact, the NCLT had to direct the commissioner of police in Ludhiana to provide police protection so that Kumar could discharge his duties.

People hindering the process were well aware that without accessing the company’s books, he would not be able to go ahead with the resolution. Records, experts said, is quite a palpable problem for turnaround experts as it is the first step towards understanding the financial health of a company.

“The availability of records is also a problem as they are not consolidated and difficult to find. At times, records are not there in the company’s registered office but elsewhere and it becomes a challenge to locate them and tally them against the company’s assets," said Sunil Gupta, associate vice-president at Resurgent Resolution Professionals LLP.

Nature of the beast

There’s another factor: by its very nature, India’s insolvency process adds to this baptism by fire. Resolution professionals, more often than not, come from various backgrounds, with very few having prior experience of running a company. A lot of the challenges faced by resolution professionals today is also because while many know the law like the back of their hand, they are not used to managing corporations.

A banker-turned-insolvency professional said that while the insolvency board has mandated 50 hours of pre-registration training for potential applicants, hands-on experience is lacking.

“IBBI should allow newly-registered professionals to assist someone senior in the day-to-day resolution process of a company. This will allow development of leadership and negotiation skills, perhaps the two most important aspects in our line of work," he said.

That said, the Anuj Jain case could have had a far-reaching impact on the future of stressed assets resolution in India. The IBC is beyond doubt one of the most preferred channels used by lenders to resolve stressed corporate loans owing to the fact that any decision taken there has judicial backing.

According to insolvency professionals Mint spoke to, if Jain’s arrest had not been quickly overturned, it would have resulted in a loss of face for the Insolvency and Bankruptcy Board of India (IBBI) which acts as the regulator for insolvency professionals. These people cited above said that IBBI received a lot of calls from senior insolvency professionals and lawyers following the arrest, requesting redressal.

“It would have clearly stopped several aspiring professionals to join this line of work, worried that they too could be blamed and put behind bars for no apparent fault," said one of the resolution professionals cited above.

When the IBC law was enacted in 2016, it was envisaged to shorten the time taken to resolve India’s bad loans through a quick and efficient judicial route, relieving the regular courts from the burden of such cases. To everyone’s dismay, the NCLT benches across the country—there are 15— are also encumbered with a backlog of cases. The caseload is just set to increase as the hiatus on filing insolvency petitions owing to covid-19 has now come to an end.

Under extant norms, professionals eligible to get registered as an RP include cost accountants, lawyers, chartered accountants, company secretaries and those with prior managerial experience. That apart, some senior bankers have also joined the profession, sensing the demand for trained finance professionals to manage large defaulters. Quite a few former executives from State Bank of India have taken the insolvency professional test and got themselves registered.

The Supreme Court will now hear the Anuj Jain arrest case in detail and is expected to lay down certain norms to be followed by police officials in such cases. (Mint has learnt that the police are now filing a closure report in the case). RPs are also hopeful that their topmost body, the IBBI, will take some action too in order to prevent a repeat of the Jain case.

“That is the only way resolution professionals can be assured that such instances are not repeated. Although, unless police officials are not made aware of the insolvency code in detail, there is no guarantee against such rogue actions," said Jain’s friend quoted earlier.

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