The government is mulling amendments in the insolvency and bankruptcy code (IBC) to permit litigation funding or third-party funding in insolvency disputes that will significantly help in bringing down the money stuck in preferential, undervalued, fraudulent, and extortionate (PUFE) transactions, an official told FE.
“The discussion is still at an early stage as we evaluate the international practices. The changes in IBC will enable specialised agencies to take over filing and pursuing cases involving PUFE transactions. Given the magnitude of funds stuck in the PUFE transactions, the government felt the need to make necessary changes,” the official said.
Unlocking Avoidance
It’s estimated that over Rs 3.8 lakh crore of funds are locked in avoidance transactions, highlighting the significant, untapped potential to attract third-party agencies in the space. Even though the IBC timlines are often breached, the legal mandate is resolve the case within 180-day period, extendable by another 90 days. This timeline is considered short to recover the assets stuck in PUFE transactions, especially since several of these transactions involve
At the moment, it’s mostly insolvency professionals (IPs) and creditors who file for applications to recover such amounts. However, once the resolution gets approved, the asset tracing and recovery action take a backseat.
“Asset recovery and tracing is a long process. Once the resolution takes place, IPs generally move on. So rather than relying on IPs or creditors who don’t have incentive to keep pursuing such cases, there’s a need to bring in specialised agency that can ensure recoveries continue to conclusion, regardless of handover,” said the official.
Besides long timelines, there’s not enough incentive for creditors (of insolvent companies) to pursue the recovery process since funding is often restricted due to estate cash constraints and complex nature of such transactions. “Amendments in the legislation is the best way forward to improve overall recoveries,” the official said.
Experts said that specialised recovery entities can also plug capability gaps in areas like tracing, evidence-building, and pursuing claims.“It would lead to less dependence on a single IP’s bandwidth. There’s going to be more consistent pursuit of recoveries, potentially better case quality and continuity even after IP leaves. There are chances that more claims can actually be pursued in the in the interest of the lenders,” said Srinivasa Rao, partner and leader (risk advisory services) at Nangia Global.
Risk vs. Reward
Globally, litigation funding in IBC disputes involves bringing in external investors who offer to bear the legal costs of insolvency proceedings, particularly for PUFE transactions. The funders typically get 25-40% of the recovered amount.
“The returns sought by litigation financiers will be commensurate with the risks they assume. Accordingly, the creditors must be prepared to part with a larger share of any eventual recovery,” said said Devendra Mehta, partner, PwC.