The IBC process should not be derailed by past promoters’ sins

The National Company Law Appellate Tribunal (NCLAT) must be commended for taking a stand against the Enforcement Directorate’s (ED) attempts to attach properties of Bhushan Power and Steel Ltd as part of investigations into alleged loan fraud and money laundering by the company’s former promoter Sanjay Singhal. The tribunal has prevented the investigating agency from derailing the Insolvency and Bankruptcy Code (IBC) and has set a good precedent for other stressed assets under the debt resolution process, where the former promoters are being investigated for alleged financial irregularities. In this case, JSW Steel emerged as the highest bidder with a commitment to pay ₹19,350 crore to financial creditors against an outstanding debt of ₹47,158 crore. Another ₹350 crore would be paid to operational creditors against claims of ₹733 crore. In effect, banks would get 41 per cent of their outstanding dues but nearly double the liquidation value of around ₹9,500 crore. This plan was approved by the National Company Law Tribunal in September. Simultaneously, the ED attached immovable properties worth ₹4,025 crore of BPSL in a money-laundering case alleging that the company and its former promoter siphoned off funds obtained as loans from various banks and financial institutions. While the ED has the right to pursue investigations against individuals, its action to attach properties that were already sold to the new buyer under the IBC rules completely undermines the entire insolvency process. There are several other companies, including Jet Airways and IL&FS, where individuals who were owning or managing these entities are being investigated for alleged irregularities. The fear of similar action on these companies by investigating agencies at a future date will drive away potential buyers from submitting a bid. It also leaves room for rival players to block winning bidders’ efforts to acquire a strategic asset by manipulating the system.

This goes against the raison d’etre of the IBC, which was set up with the objective of providing a platform for all stakeholders to find new buyers for stressed assets in a time-bound manner, avoiding liquidation and the attendant destruction of value, while saving jobs. If investigating agencies start attaching properties in the middle of this process, it will threaten the functioning of the IBC, leading to value destruction of assets. NCLAT chairman Justice SJ Mukhopadhyaya rightly observed “You (ED) are going to kill the economy of the country. You are playing with fire. No outsider will come and purchase distressed companies.”

While the ED has moved the Supreme Court against the NCLAT order, the Centre should step in to give more teeth to the IBC laws. Liabilities arising out of investigations into former owners or management of a stressed company that is undergoing insolvency should be limited to the individuals who have been identified as the perpetrators of a crime. The entire company, its assets, and its new owners should not be held hostage for past sins.