Bankruptcy resolution professionals who shepherd broke companies to their new homes are increasingly under fire from lenders, at a time of shifting landscape in India’s insolvency resolution.
Over the last two years, a number of RPs have found themselves in the dock, on charges varying from wrongful classification of creditors and collusion with previous managements, to mismanagement of daily affairs.
Lenders’ clashes with RPs are rising as the insolvency cases reach the stage of adjudication, said Ashish Pyasi, founder of Aendri Legal. “Creditors are pushing for a change of RP if the decision taken by him is not suited to the creditors; then, they prefer to replace them and want to have complete control over the resolution process”, said Pyasi, whose law firm specializes in insolvency, dispute resolution and commercial litigation.
Slowdown in courts
As of 30 June, 1,973 corporate insolvency cases were under various stages, according to data from the Insolvency and Bankruptcy Board of India (IBBI). Insolvency lawyers said when allegations reach the courts, the resolution process slows or stalls. A change of RP makes it worse.
In the case of gaming and entertainment company Smaaash, founder Shripal Morakhia accused RP Bhrugesh Amin of corporate governance issues, and collusion with the management to secure pay hikes. Nazara Technologies has been approved as the successful resolution applicant to turnaround Smaaash.
“In many cases, the RP faces challenges in obtaining access to sufficient information necessary for managing the company’s operations and collecting data during the insolvency process. While the IBC law provides a framework for this process, practical issues often arise due to limitations in information sharing between the management and the resolution professional. These challenges can lead to differences in approach, and managing these complexities effectively is crucial for a smooth resolution process,” Amin said.
“Additionally, the RP is duty-bound to investigate and report on Preferential, Undervalued, Fraudulent, and Extortionate (PUFE) transactions, which can understandably create some level of apprehension among promoters. This can sometimes lead to communication gaps or differing priorities, which may contribute to delays in the Corporate Insolvency Resolution (CIR) process,” Amin added.
Byju’s case
On 4 September, US-based Glas Trust LLC approached the insolvency court to replace Byju’s RP Pankaj Srivastava, accusing him of “gross misconduct”. Separately, Aditya Birla Finance accused Srivastava of ‘fraud’ for wrongfully classifying it as an operational creditor. The Supreme Court asked Srivastava not to call the creditor’s meeting, and reserved its order in the insolvency petition against the edtech firm.
In the case of Future Retail, operational creditor Koinonia Coffee Pvt. Ltd moved the National Company Law Tribunal (NCLT) in March 2023 charging “collusion” between resolution professional Vijay Kumar V. Iyer, the company’s ex-management and certain other entities.
In the Go First insolvency case, lessors including Pembroke Aircraft Leasing, SMBC Aviation and DAE objected to RP Shailendra Ajmera on maintaining aircraft until the case was resolved. He was tasked with ensuring that the aircraft were kept in good condition and that all relevant maintenance records were made available to the lessors.
However, lessors alleged during the hearing that the RP failed in this task, leading to significant deterioration of their assets. During the hearings, it was also noted that Go First staff had not been paid their salaries since August 2023.
Considering these complaints, Justice Tara Vitasta Ganju, presiding over the case, issued a contempt notice against Ajmera on 11 March, 2024, for disobeying court orders regarding the maintenance of the aircraft and the provision of documents to the lessors. Currently, the RP has filed for the airline’s liquidation, but a formal order is awaited from the NCLT.
Email queries sent to the RPs of Byjus, Future Retail and Go First remained unanswered.
IBBI suggesting detailed guidelines
Bikash Jhawar, a senior partner at Saraf and Partners said, “The increase in such cases of RPs being questioned is essentially due to IBBI suggesting more detailed guidelines, which some read wrongly as taking away from RP and CoC any ability to be dynamic in defining a resolution process. May be, if IBBI could clarify that the processes suggested by it under the regulations are not a mandate but more a suggested template, it could serve to reduce quibbles. Also, RPs need to understand they are not owners of the corporate debtor, but an agent and trustee of stakeholders and should act as such”.
Jhawar said these actions delay the process, but more importantly, they result in sub-optimal outcomes. An IBC-based corporate debtor is not an ideal target, and so often, it may require imaginative restructuring to be resolved; however non-cooperative managements and misaligned minority creditors can frustrate attempts at such resolution by reading suggestive IBBI guidelines as being prescriptive and mandatory, Jhawar added.
The IBC law and its understanding are evolving, said Ritesh Prakash Adatiya, director at NPV Insolvency Professionals Pvt. Ltd. “The complexity and the contradictory decisions taken by various benches and NCLAT are available to the litigants to raise objections and issues which were not available a few years back, which has increased these instances” Adatiya said.
The law is still evolving and will take time to settle down. Adatiya said. “There are some necessary changes in the process to get some clarity, which I believe IBBI and the government are continuously monitoring and doing their part,” he added.
In what could help the RPs, a 28 May judgement by the Kerala High Court also held that resolution professionals cannot be hauled up in criminal proceedings initiated against bankrupt firms.
