Code: Crime & Punishment

The Insolvency and Bankruptcy Code 2016, is very succinctly described in terms of its objective. It is what may be termed, euphemistically and rightfully, a high impact reform that has potential to change the landscape forever.

The storm that it has created in the past few quarters did make things a bit hazy. Most of the discussion so far has been focused on the threshold level dynamics, regarding admission, on whether a particular Corporate Insolvency Resolution Petition (CIRP) should be admitted in or not. The requirements are very different from its predecessor, the BIFR.

As the dust takes its time to settle down, the narrative would slowly shift focus on the various finer provisions in the Code. The thick brush will give way to the finer tools, for the picture to emerge. In any new piece of legislation, there are the usual sticks in built to ensure compliance and penalize deviations. The Insolvency and Bankruptcy Code too has its share.

bankrupt insolvent bankruptcy debt insolvency

This short paper attempts to have a closer look at some of these penal provisions that aim at controlling the behavior of the stakeholders, across the whole gamut, from the Resolution Professional, the Debtor, the Creditors and the Claimant Creditors. There are a few loose ends where probably the intent of the legislation is unclear and would need some attention in the near future.

“The man who has a conscience suffers whilst acknowledging his sin. That is his punishment.” ― Fyodor Dostoyevsky

The noir story teller, Dostoevsky, had created many characters in his epic saga of a young man of law intoxicated on ideology, but probably the most complex character in the story, would be Arkady Ivanovich Svidrigaïlov.

Arkady, had fallen for the physical attributes and feminine grace of Dunya, the Governess in his vastly superior family. However, she refuses the overtures of the rich and married man, and leaves the job to travel to St Petersbugh alongwith her mother where her brother, himself was struggling with his finances. Soon enough Arkady, having disposed of his wife, follows Dunya to St Petersburg, where by a stroke of luck he overhears Dunya’s brother confess of his own crimes.

This advantage that he gains emboldens him to make another hostile takeover attempt on Dunya. However, when she still refuses and even tries to kill him, Arkady, experiences a change of heart. Eventually, forced to face his own decadence and the fact that Dunya will never love him, Svidrigailov commits suicide.

bankruptcy insolvency bust business financial

Some crimes seek out their own punishments!

It is a philosophical novel that looks at the crimes committed by different people, with almost every character being, in some degree, guilty of some or other crime, mostly crimes that would not fall strictly in the legal bucket. And the corresponding punishment that each misdeed entails is a subject that has influenced philosophers and legal luminaries for ages.

The lines between philosophy and law are very thin since the times of the Greek philosophers. Law itself has evolved out of the intellectual expressions of the great thinkers, and even today when the highest courts interpret questions of law, their long winding judgments are seminal outputs of philosophical thinking, for eg, the 53 page judgement delivered by the High Court in the matter of Jotun India Private Ltd Vs PSL Holding is a crash course on the insolvency laws of India, or for that matter the SC judgement in the matter of Macquaire Bank Vs Shilpi Technology, where the SC admitted the CIRP application, overruling the NCLAT and NCLT. The judgment delivered by Justice R.F. Nariman is a lesson in itself, not just on the Code but on the mechanics of the legal system.

bankruptcy insolvency insolvent economic collapse

Principle of Proportionality

The system of crimes and punishment that evolved in the UK of 18th century, from which most of the world derives its law books, was marked with an intent, that was not to punish the crime, but to prevent recurrence.

By the year 1776, there were 220 offences in the statute book that were punishable by death. George Savile, 1st Marquess of Halifax succinctly summarized the Crime & Punishment system to be aimed at,

“Men are not hanged for stealing horses, but so that horses may not be stolen.”

Grand larceny, defined as a theft of goods worth more than 12 pence, (about 5% of the weekly wages of a skilled worker) was a crime that drew death penalty. The system was aptly described as the Bloody Code.

It was bound to evolve as the Judiciary realized the harshness of the Punishments against the severity of the Crime. By 1823, the Judgment of Death Act made the death penalty discretionary for all crimes except for treason and murder. Gradually during the middle of the 19th century, the number of capital offences was reduced and by 1861 was down to five. The last execution happened in the UK in 1964, since then death penalty was abolished.

The newly liberated Colony was ahead in legal reforms, post the War, and in 1791, the Eighth Amendment was accepted, as part of the Bill of Rights. It prohibited the Federal Government from imposing excessive bail, excessive fines, or cruel and unusual punishments. The US Supreme Court extended the jurisdiction of the Eighth Amendment, in particular of the clause, Cruel and Unusual Punishment, to the states also.

The Supreme Court of the United States applied these exalted principles for the first time in the case of a Syrian immigrant, Hosep Bajakajian, who had attempted to take USD 357,144, to Cyprus, thereby violating provisions of Bank Secrecy Act, which mandates that all international transfers exceeding USD 10,000 to be reported on a Currency and Other Monetary Instruments Report. The Bank Secrecy Act, as a penal provision, allows forfeiture of “any property, real or personal” in cases of violations.

The case eventually reached the Supreme Court and on 22nd June 1998. Justice Clarence Thomas concluded,

Comparing the gravity of respondent’s crime with the USD 357,144 forfeiture the Government seeks, we conclude that such forfeiture would be grossly disproportionate to the gravity of the offence.”

This judgment was the outcome of the stance the Supreme Court had outlined about a decade back, when in 1983 it had ruled that Courts must do three things to decide whether a sentence is proportional to a specific crime,

  • Compare the nature and gravity of the offense and the harshness of the penalty,
  • Compare the sentences imposed on other criminals in the same jurisdiction,
  • Compare the sentences imposed for commission of the same crime in other jurisdictions.

“It takes something more than intelligence to act intelligently.”

― Fyodor Dostoyevsky

insolvency shield town sign note market economy

Crime & Punishment in the Insolvency Code

With this backdrop when we look at the penal provisions enshrined in the Insolvency & Bankruptcy Code, we come to distinct, stark and some very sharp conclusions. The first set of provisions pertaining to Crime & Punishment appears in Chapter VII of Part II of the Code.

To understand how the concept of proportional punishment is incorporated in the Code, let us review the scenario u/s 68, which looks at the crime of concealment of property on the part of any officer of the corporate debtor.

u/s 68.1. “where any officer of the corporate debtor has

(i) Within the twelve months preceding the insolvency commencement date,

a. willfully concealed any property or part of such property of the corporate debtor or concealed any debt due to or from, the corporate debtor, of the value of ten thousand rupees, or more, or,

b. fraudulently removed any part of the property of the corporate debtor of the value of ten thousand rupees or more, or,

c. willfully concealed, destroyed, mutilated or falsified any book or paper affecting or relating to the property of the corporate debtor or its affairs, or,

d. willfully made any false entry in any book or paper affecting or relating to the property of the corporate debtor or its affairs, or,

e. fraudulently parted with, altered or made any omission in any document affecting or relating to the property of the corporate debtor or its affairs, or,

f. willfully created any security interest over, transferred or disposed of any property of the corporate debtor which had been obtained on credit and has not been paid for unless such creation, transfer or disposal was in the ordinary course of the business of the corporate debtor, or

g. willfully concealed the knowledge of the doing by the others of any acts mentioned in clauses (c), (d) or clause (e), or

(ii) at any time after the insolvency commencement date, committed any of the acts mentioned u/s 68.1.a. to 68.1.f. or has the knowledge of the doing by others of any of the things mentioned in sub-clause (c) to (e) or clause (i); or

(iii) at any time after the insolvency commencement date, taken in pawn or pledge, or otherwise received the property knowing it to be so secured, transferred or disposed,

such officer shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years and with fine, which shall not be less than one lakh rupees, but may extend to one crore rupees or with both.”

To put the relevant provisions in brief, an officer of a corporate debtor who has the knowledge of anyone, “willfully made any false entry in any book or paper affecting or relating to the property of the corporate debtor or its affairs, or,” would be considered to have committed a crime u/s 68.1.i.d.

While the value (of the property involved) has been specified u/s 68.1.i.a and u/s 68.1.i.b, to be Rs 10,000 or more, but it has not been specified u/s 68.1.i.d, besides others.

However the corresponding punishment for the crime u/s 68.1.i.d. is the same as it is u/s 68.1.i.a or u/s 68.1.i.b, i.e. imprisonment for a term ranging from three to five years and with fine, ranging from one lakh to one cr rupees.

There appears to be a case for proportionality of punishment, as even a penalty of Rs One lakh with or without the imprisonment may appear harsh for a crime of concealment involving ten thousand rupees or worse in the case of Section 68.1.i.d. where even a hundred rupee transgression may invoke a penalty ranging from a minimum of one lac Rs with or without three years time.

“there are certain persons who can… that is, not precisely are able to, but have a perfect right to commit breaches of morality and crimes, and that the law is not for them.”

Fyodor Dostoyevsky

The provisions of the Code in particular when they are applied to corporate debtors are pretty harsh as was seen in practice, in the case of Unigreen Global Private Limited, (Unigreen hereafter)

Contemporary political philosophers distinguish between two principal theories of justifying punishment.

First, the retributive approach maintains that punishment should be equal to the harm done, either literally an eye for an eye, or more figuratively which allows for alternative forms of compensation.

The retributive approach tends to be retaliatory and vengeance-oriented. The second approach is utilitarian which maintains that punishment should increase the Gross Happiness in the world. This often involves punishment as a means of reforming the criminal, incapacitating him from repeating his crime, and deterring others. A premium is placed on the deterrence value of punishment.

In a historic judgement on 8th May 2017, NCLT New Delhi, found Unigreen guilty u/s 65.1. which mandates,

“if any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation as the case may be, the Adjuticating Authority may impose upon such a person a penalty which shall not be less than Rs One lac, but may extend upto one crore rupees.”

Unigreen had filed a CIRP petition in the New Delhi NCLT. It fulfilled the conditions given u/s 10 of the Code for a corporate to file a insolvency petition, and was not disqualified u/s 11 of the Code.

The applicant is required to fill in the Form 6, which has three parts, as follows

  • Part I, being particulars of the corporate applicant
  • Part 2, being particulars of the proposed interim resolution professional
  • Part 3, being particulars of financial/operational debt

As required, the Corporate debtor also disclosed the financial creditors to whom it owed debts, which was more than one hundred crores, across Vijaya Bank, Corporation Bank, Oriental Bank of Commerce and PNB. PNB with 54 cr had the highest share of the outstanding debt.

Under the Rules for Application to Adjudicating Authority, under Rule 7.2.

“the applicant under Rule 7.1. shall dispatch forthwith, a copy of the application filed with the Adjudicating Authority, by registered post or speed post to the registered office of the corporate debtor.”

Technically, there is no provision in the Code, or the Rules or the Regulations that require a corporate debtor applying for CIRP u/s 10 of the Code, to send a copy of the CIRP petition to its creditors. Practically, also that would be difficult, and a tedious task, considering that some corporate may have hundreds of creditors.

However, the NCLT Bench directed the Corporate Applicant to serve a notice of the application as filed before the Tribunal to its financial creditors so as to ascertain if they had any objection in relation to the initiation of the CIRP as prayed for by Unigreen. There is no reason or provision in the Code to find out if any creditor has any objection to a CIRP initiated by a Corporate Debtor. Furthermore there is no provision for any further course of action in case any financial creditor has objection. Such objection, in short, has no locus standi on the admission of the CIRP.

PNB and OBC raised objections, and in particular, PNB pointed out that the applicant had not disclosed all the relevant facts in relation to the assets mortgaged or the securities furnished to above financial creditors and the legal web in which it has been entangled by the owners themselves of the said properties.

The Banks contended that the Corporate Debtor was trying to avoid making lawful payments of the dues owed to the Bank and also thwarting Bankers from realizing the securities by initiating several legal proceedings in different courts and Forums with the sole motive of removing their personal properties from the clutches of law and that CIRP was also an attempt in the same direction.

The NCLT Bench concluded that the admission of CIRP would have implications as with the invocation of moratorium u/s 14, whatever action the financial creditors take or have taken under SARFAESI would be stayed for a period of atleast six months and seems to be the motivation for the petitioner to approach the Tribunal under IBC 2016 rather than to put into effect the avowed objects of the Code.

The NCLT Bench stated, “we cannot be a party to such malafide intentions on the part of the corporate debtor and this is a clear case of abuse of process of law which should be discouraged at the threshold.”

Not just the NCLT dismissed the CIRP, it also, “With a view to discourage the parties from abusing the process of IBC 2016, and this Tribunal, we deem it as a fit case to impose costs as contemplated u/s 65.1. of the Code.

It imposed a fine of Rs 10 lacs on Unigreen. The principle of deterrence that underpinned the Bloody Code of 18th century UK glanced through from the NCLT decision.

This decision of the NCLT was of course put to review in the NCLAT, but the approach of the bench in the way it treated the two stakeholders on the Debt and Equity side, did say something about the approach of those who are expected to enforce the Code.

However, we need to look not just at the enforcement aspect but also the legislative aspect in terms of the way the Code itself looks at misdemeanors on the part of the different stakeholders.

When we look at punishment for the same kind of crime, the rule of proportionality mandates that similar nature and intensity of crime should invite similar punishment.

The same can be gauged at by reviewing the provisions u/s 74 and 75 of the Code.

“all men are divided into ‘ordinary’ and ‘extraordinary.’ Ordinary men have to live in submission, have no right to transgress the law, because, don’t you see, they are ordinary. But extraordinary men have a right to commit any crime and to transgress the law in any way, just because they are extraordinary.” ― Fyodor Dostoyevsky

town sign bankruptcy insolvency illiquidity

The Bankruptcy Law Reforms Committee, the source document for the Insolvency Code, addressed the issue, in the following manner, which was more of in the way of stating the broad guiding principle,

“in exercise of their supervisory and enforcement powers, regulators need to assess whether or not regulated entities have adequately complied with the provisions of the law and in case of any detected breach, they have the power to impose appropriate penalties. These wide ranging executive powers given to regulators necessarily need to be balanced with proper systems governing the application of administrative law.”

It would be pertinent to note that the Insolvency & Bankruptcy Code was a well studied response to the NPA inferno that was burning down the banking sector, in particular the PSB sector, which was saddled with over 10 trillion of assets that were written off or on the verge of being written off. The NPA inferno mostly had left the private sector banks and the foreign banks untouched.

It can be deducted that the largest shareholder of the PSB, who was being bled by the NPA pile up, eventually formulated his Recovery Plan through the Code.

The Code was introduced by the Government of India in the Parliament on 21st Dec 2015, and after a substantial period of time spent on deliberations was sent to the President on 11th May 2016, to be assented by Shri President Pranab Mukherjee on 28th May 2016.

On 23rd Nov 2017, the President assented to the First Amendment Ordinance that brought in restrictions on attempts made by existing promoters to retain control of the company in resolution. Section 29A laid down a whole range of disqualifiers on existing promoters, related parties, distantly related parties, or any body who is remotely related to the existing parties, from bidding, unless they have cleared off their past dues to the banking system.

It was an optically very sound move for it conveyed the impression that the Government would not let the creditors suffer a huge haircut even as the same promoter manages to retain their control as it had happened in the case of Synergies Dooray, the first off the block in the newly implemented legislation.

It is the penal provisions dealing with the similar transgressions by different stakeholders that betray a familiar approach that may creep in when the odds are stacked against the corporate debtor or against the promoters, who have long been perceived as the fall guys.

There can be many reasons the promoters of a corporate entity may have failed, spanning economic cycle, business conditions, shocks in raw material supplies, changing fiscal policies that changes the supply dynamics, the interest costs itself, or in the worst case scenario, the willingness on the part of the promoter to repay the debt.

The role of the lender in such a scenario, right from the stage of Project Approval, to Loan Sanction, to Loan Disbursement and thereafter to Loan Monitoring has so far not been looked into. If there is a Crime of a Debt Default, then the lender may not be completely blamefree, even if we scotch the long held belief in the Indian banking sector on how much does a borrower has to pay for every rupee of loan disbursed, and how the banking system worked hard on ever greening the loans gone sour.

The differences in the way a Corporate Debtor is dealt with vis a vis a Financial Creditor in particular a PSB, is apparent not just in the law but also in the interpretation and practice as such, even as we consider the Unigreen case as an exception, a mere anecdotal data point.

The Code combined with the Rules for Application to the Adjudicating Authority, lays down certain requirements for applicants filing a CIRP. There is substantial amount of information sought by the Adjudicating Authority to enable it to arrive at a reasoned decision.

We now look at the information sought from the Financial Creditor vis a vis the Corporate Debtor when initiating a CIRP.

For a financial creditor who applies u/s 7, he needs to fill in the Form 1, which has five parts,

  • Particulars of the applicant
  • Particulars of the corporate debtor
  • Particulars of the proposed Interim Resolution Professional
  • Particulars of the Financial Debt
  • Particulars of the Default

Since the financial creditor is initiating CIRP, it is pertinent that it will have to submit a proof of default that the Adjudicating Authority can ascertain. Once the default (of more than one lac) is established, then as the Supreme Court had decided in Mobilox Technology Vs Kirusa Software case, the NCLT has to admit the CIRP.

For a Corporate debtor who initiates the CIRP on its own, he needs to provide information about itself, about the proposed IRP and details of the debt.

It is very much possible, that there may be discrepancies while filling up the forms or while providing the attachments in support of what is stated in the forms. These discrepancies may either be intentional or unintentional. The penalties are also provided for the crime of submitting false information in the application.

In the case of a Financial Creditor submitting false information, then u/s 75

“where any person furnishes information in the application made u/s 7, which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material, such person shall be punishable with fine which shall not be less than one lakh rupees, but may extend to one crore rupees.”

In short, a financial creditor is liable to a Punishment ranging from Rs One lac to Rs One cr if found guilty of submitting false information.

In the case of a corporate debtor submitting false information, then u/s 77,

“where,

(a) a corporate debtor provides information in the application u/s 10 which is false in material particulars, knowing it to be false and omits any material fact, knowing it to be material; or

(b) any person who knowingly and willfully authorized or permitted the furnishing of such information under sub-clause (a)

Such corporate debtor or person, as the case may be, shall be punishable with imprisonment for a term which shall not be less than three years, but which may extend to five years and with fine which shall not be less than one lac but which may extend to one crore rupees, or with both.”

Firstly, one needs to note the difference in which the Crime itself is defined in the two cases. The wording is almost similar between section 75 and section 77.a. where it defines the extent and scope of the misdemeanor.

However, the provisions of section 77.b. which extends the Crime to the seniors in the organization who approved the incorrect application is non-existent in the case of section 75.

It implies that when the CFO of a corporate debtor files an incorrect CIRP Form 6, it may implicate the CEO who may have approved the application. But when a bank manager (say an AGM) files an incomplete or incorrect application form, it shall not implicate his senior (say DGM or GM) who would have approved the incorrect application form.

Secondly, for the same transgression, the penalties vary, as in the case of a financial creditor the punishment is limited to monetary penalties, whereas in the case of corporate debtor the punishment also extends to imprisonment.

Closing Argument

However, the problem that the Code needs to address at a conceptual level is much larger than the tactical differences in the way Punishment is meted out for the same Crime committed by different people.

“all men are divided into ‘ordinary’ and ‘extraordinary.’ Ordinary men have to live in submission, have no right to transgress the law, because, don’t you see, they are ordinary. But extraordinary men have a right to commit any crime and to transgress the law in any way, just because they are extraordinary.” ― Fyodor Dostoyevsky

When we look at the disclosures that are required to be made, there is a lot expected, though not legally mandated from the corporate debtor filing for CIRP u/s 10.

It would be pertinent at this point to note that Unigreen had appealed in the NCLAT against the NCLT order, and NCLAT took a broader view of the matter, when it observed, in its order dated 1st Dec 2017,

“34. Further, as we find that the Adjudicating Authority has noticed the extraneous factors unrelated to the Resolution process not required to be disclosed in terms of Section 10 or Form 6 and as the suits referred to relate to dispute between third parties, and not the Corporate Debtor, we hold that the Adjudicating Authority erred in rejecting the application on the ground of suppression of facts.”

When it comes to suppression of facts, it is time we looked at the facts unpresented in one of the high profile cases, that has dominated the news for the past year or so. It is not uncommon, and neither the issues arising exceptional, but rather the norm.

On 2nd August 2017, NCLT Ahmedabad, passed an order, in which under para 23, it made a pertinent observation,

“In the case on hand, from the material placed on record by SCB and SBI, it is clear that it is established that Essar has committed default in repayment of financial debt to SCB and SBI. The applications filed by SCB and SBI are complete in all respects.”

“He is a man of intelligence, but to act sensibly, intelligence is not enough.”

― Fyodor Dostoyevsky

We need to review the leadership team in charge of the steering wheel, to see what and who guided the company into insolvency.

As per the Annual Report of 2016-17, the Board of Directors comprised of

Name Director Status
Prashant Ruia Director
Jatinder Mehra Director
Praveen Malhotra Director
Gayathri Sukumar Director
Dilip Oommen Managing Director
Mahadev Iyer Director – Finance
Rajiv Bhatnagar Director – Projects
VG Raghavan Independent Director
Arvind Pande Independent Director
Sunit Joshi Nominee Director – SBI
H. Biswas/A. Sengupta Nominee Director – IDBI Bank

The Board met four times during the FY 17, and Sunit Joshi the Nominee Director from SBI attended the two Board Meetings held on 22 Nov 2016 and 22 March 2017. A few months later it was SBI who filed the CIRP u/s 7 of the Code. (yes SCB too filed)

During the year, a Techno Economic Viability (TEV) was conducted by MECON, estimating the future level of production, sales and EBITDA. The company submitted a detailed proposal to the banks seeking restructuring of debts. This proposal was under consideration of the lenders and pending decision on the debt restructuring, the lenders permitted “holding on operations” arrangement to the company, which enabled the company to conduct day to day banking operations like availment of LCs upon funding, issuance of bid bond and other guarantees etc..discounting of LC backed sales and purchase bills etc. A fixed percentage of sales collections of the company was paid to the banks as “tagging” towards the past dues of the banks.

Further, the lenders appointed E&Y as concurrent auditor to review the cash flows of the company and all payments exceeding one million.

In its order on 2nd August 2017, the NCLT Ahmedabad made one more observation, which addressed the observation made by the High Court of Gujrat, where Essar Steel had filed a petition against the RBI instruction and press release, under para 24.

From the material placed on record, it is in the year 2014 that Debt Restructuring Process commenced. For one reason or the other, the Debt Restructuring Process has not been finalized till today or till the date of filing of the Applications.”

It was not necessary for the NCLT to make observations on the status of DRP, however it had become essential, as the Gujrat High Court had ordered in the matter.

The High Court was hearing a writ petition filed by Essar Steel invoking Article 14, 19.1.g. and 226, that challenged RBI’s decision to direct banks to initiate proceedings against 12 companies including the steel major. The central bank had also released a press statement on 13 Jun 2017, where it had detailed the decision of the consortium of lenders to initiate proceedings u/s 7 of the Code, following its failure to implement the debt restructuring package approved by the Essar Board of Directors.

In its order the High Court concluded in para G,

“Provisions of the Code may be drastic to some extent, but since it is part of statute which is yet not declared unconstitutional and therefore they are to be followed, but in consonance with Constitutional mandate by all concerned, i.e.

(1) not to act on it mechanically and that all provisions may not be treated mandatory but it could be treated directive only based upon facts, circumstances, and evidence available before the authority.”

It went on to add, under para H,

“So far factual details of Petitioner Company with reference to its activities and exercise of restructuring through JLF is concerned, it would be appropriate not to enter into any determination on such point since that would be the subject matter before the Adjudicating Authority under the Code and therefore it is left open for it to consider it for its determination in accordance with law, to avoid any prejudice to either party by discussion and determination on any such issue at this stage by the Court, where core issue is whether there is reasonable classification by the RBI and not whether insolvency proceedings should be admitted or continued or not.”

“Oh, as I stood above the Neva this morning at dawn I knew I was a villian.”

― Fyodor Dostoyevsky

As such the HC left the decision to the appropriate forum mandated with the job of ascertaining a CIRP under the Code. However, given that the there was also a mandate from the HC to consider the efforts made by the corporate in the debt restructuring to make good the defaults, the NCLT was expected to look into the restructuring aspect, although that is not a legal requirement under the Code.

In its order dated 2nd August 2017, the NCLT observed that

From the material placed on record, it is in the year 2014 that Debt Restructuring Process commenced. For one reason or the other, the Debt Restructuring Process has not been finalized till today or till the date of filing of the Applications…. As contended by the learned Senior Counsel for Essar, there are several reasons that prevented Essar from discharging its debts.

No doubt there are no allegations of siphoning of funds, diversion of funds or fraud, but the fact remains that except showing a little progress in the last financial year, there appears to be no scope for Essar to repay its debts till 25 years or in a span of 25 years.”

Now we can ignore the futuristic observation regarding 25 years made by the NCLT, but there were two significant points made,

Firstly, there was no shady transactions by the promoters, and secondly, that there could be many reasons why the Restructuring Process did not reach its logical closure.

This inspite of the TEV assessment by Mecon and the subsequent project by E&Y for assessing cash flows, and the “tagging ofF’ of sales whereby a fixed percentage of sales was paid off to the lenders.

It raises a pertinent question, of whether the CIRP filed u/s 7 by SBI, should also have contained disclosures on efforts taken by the lender in resolving the default before approaching the NCLT.

In the instant case, as it happens SBI has significant shareholding in the Company. It has been involved with the company in Debt Restructuring for over two years preceding the initiation of CIRP. It also had a nominee on the Board. It was in the thick of the management of the company, in policy formulation and also oversight of the business.

Can it really wash its hands off and file a CIRP, and if it is allowed to do so, should it be required to disclose the diligence practiced by it as a lender, right from the sanctioning of the loan to disbursement and to subsequent monitoring of the account, from a business perspective, and in particular when it has a nominee on the Board.

So when there is an insolvency case, it is imperative to establish the role of the creditor in the journey of the corporate debtor which resulted in an insolvency situation, particularly when the creditor is filing a CIRP u/s 7.

May be the next time the legislators meet, they may consider leveling the ground between the Debt and Equity, for we no longer operate in a socialist framework, where Equity needs to be put in the dock pronounced as guilty even before the proceedings have begun. It is time we acknowledge that if an insolvency has arisen, it is because the marriage between Debt & Equity did not work out.

In any divorce, rarely does one side has the privilege of exclusive credit for the reasons of failure.

“You’re necessary to me, and that’s why I’ve come to you” ― Fyodor Dostoyevsky

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