When the Central Bureau of Investigation (CBI) finally registered a case against ABG Shipyard and its promoters for committing a loan fraud to the tune of Rs 22,000 crore, all hell broke loose.
It was probably the biggest loan fraud case recorded in India, and even before the CBI caught up with the promoters of ABG Shipyard, information about their financial misadventures was already in public even if not many had paid attention to it.
The resolution professional handling the Surat-based shipping company’s CIRP had detected several fraudulent transactions and had informed the same to the Ahmedabad bench of the National Company Law Tribunal (NCLT).
The resolution professional had pointed out over half-a-dozen such transactions involving over a thousand of crores.
The NCLT while ordering the liquidation of ABG Shipyard in April 2019 had agreed with the resolution professional’s findings.
Yet it took almost three years for CBI to lodge a formal FIR against the company and its promoters.
Avoidance transactions
Under the provisions of Insolvency and Bankruptcy Code (IBC), the resolution professionals are supposed to find out if promoters of a company undergoing insolvency proceedings have committed any fraudulent transactions in the past.
He/she has to then bring the same to the notice of the NCLT, which if finds merits in the findings may even order claw-back or disgorgement of value lost through such avoidance transactions.
But despite these transactions being reported by resolution professionals, they are not necessarily leading to further investigations by government agencies like CBI or SFIO.
The reason, experts believe is inability of the NCLT to close the applications on Avoidance Transactions on time giving the necessary legal sanctity to the findings of resolution professionals.
According to the Insolvency and Bankruptcy Board of India (IBBI), so far resolution professionals have filed 675 applications with NCLT pointing out fraudulent transactions to the tune of R2.05 lakh crore undertaken by the promoters of the companies undergoing insolvency process.
But not many of these cases are reaching their logical conclusion – further investigations and action against the perpetrators.
“There have been practically zero disposal or may be a few disposals of those matters by NCLT. Unless the matter is disposed of one cannot say that there were Avoidance Transactions. The resolution professional can only produce the matter before the NCLT to take a view, because the RP is not an authority or a government investigator,” points out a senior IBBI official, who requested anonymity.
Courts have also not helped much.
In the Jaypee Infratech case, resolution professional Anuj Jain had pointed out illegal deals involving 900-acre land undertaken by the promoters.
The NCLT agreed with the resolution professional’s findings but NCLAT set it aside.
However, the RP followed it up in the Supreme Court and he got a favourable order.
The IBBI official quoted above said that thanks to the RP’s perseverance that the avoidance transaction got established, however, he said that not all RPs might have taken the pain to follow it up in the SC.
In another case, the Delhi HC observed that if an application of avoidance transaction has not been disposed of by the time the insolvency process is over, then the application lapses.
This created a lot of uncertainty as the law says that CIRP can be disposed of even if the application of avoidance transaction goes on.
Also, the main objective of the law is to protect lenders’ interest by avoiding preferential, undervalued, extortionate and fraudulent transactions.
Therefore, the focus is more on clawback of lost value rather than the criminal proceedings against those involved in these transactions.
Yogendra Aldak, partner with law firm Lakshmikumaran & Sridharan, however, says that Section 69 (of IBC) fixes criminal liability on anyone who is involved in a fraudulent transaction.
Further investigation
According to legal experts, if the amount involved in fraudulent transactions detected by the resolution professional is large then the Serious Fraud Investigation Office (SFIO) can be asked to investigate the matter.
The sources from IBBI official told TNIE that ABG Shipyard is one such case which was being investigated by the SFIO as well.
A corporate affairs ministry official told TNIE that so far less than 10 such cases – where avoidance transactions have been reported – are being investigated by the SFIO.
“Typically, large cases involving Rs 500 or more are investigated by SFIO, but there have been cases involving lesser amounts have been asked to be investigated by SFIO keeping in mind the public interest,” said a senior official from the corporate affairs ministry.
Meanwhile, in order to give more teeth to the law, the government wants to amend the law.
The law would be amended to say that the application on avoidance transaction remains valid even after the closure of the insolvency case.
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