Though the National Company Law Tribunal (NCLT) has dismissed Edelweiss Asset Reconstruction Company’s petition against the insolvency resolution done in the case of Synergies Dooray, the allegations made show there are gaping loopholes in the process.
Though the National Company Law Tribunal (NCLT) has dismissed Edelweiss Asset Reconstruction Company’s petition against the insolvency resolution done in the case of Synergies Dooray, the allegations made show there are gaping loopholes in the process that can be used by unscrupulous promoters. Given the banking sector’s bad loans have already crossed Rs 8 lakh crore and there is more in the offing—according to Credit Suisse, 67% of power sector debt and 46% of telecom debt has an interest cover of less than one—the scope for abuse is enormous. One of the rules of the insolvency process is that related parties that hold debt are not considered to be part of the committee of creditors that decides on the future course of action. In this case, however, the debt held by a group company of Dooray was transferred to another company which, because it was not a related party, then got higher voting rights in the committee of creditors—had this not taken place, the composition of the creditor committee would be quite different.
Edelweiss also complained about the insolvency resolution professional (IRP) since, in this case, the resolution plan of a Dooray group company was accepted and this involved paying creditors a mere 5% of their debt. Since the point of the insolvency process is often to get rid of promoters while writing off debt, it is surely odd that such a thing should happen. While dismissing Edelweiss’s petition, NCLT has said that because the proceedings before it are of a summary nature, it cannot examine the aspect of mens rea to be able to see whether the provisions of the insolvency code have been complied within their true spirit.
This is a serious problem and a way needs to be found to plug this loophole in the insolvency code. If there is a possibility of promoters colluding with IRPs and using this to drive a very good bargain at the creditors’ committee and then capture the indebted firm by using a group/front company, this defeats the very purpose of the law. It will also give the resolution process a bad name. In which case, the law has to ensure the IRP is truly a top-class professional and must have in place stringent technical and financial qualification criterion to ensure the system is not gamed—punishment for pliable IRPs, as has been done for accountant firms who have helped clients break the law, also needs to be a part of the system.
As part of this process, if need be, in the interest of substantive justice, the courts must be able to pierce the corporate veil as they have done, for instance, in the case of Sahara where the promoter Subrata Roy is in jail for non-payment of debts—unless the corporate veil is pierced, where is the question of action being taken against the promoter or the company’s board of directors? If this is not done, the process will get reduced to just another one of crony capitalism with debt-ridden promoters able to keep control of their firms through front companies while forcing banks and other creditors to take ridiculously large haircuts.