IPs who claw back maximum value lost in fraudulent transactions should get a premium in the market
Former chairperson of Insolvency and Bankruptcy Board of India (IBBI) MS Sahoo feels that an insolvency professional who claws back the maximum value lost through fraudulent transactions (preferential, undervalued, fraudulent and extortionate transactions) should get a premium in the market.
Likewise, he says, that the market should penalise those, who neglect or do a poor job in respect of PUFE transactions, in addition to the penalty by IBBI and IPA.
Former chairperson of Insolvency and Bankruptcy Board of India (IBBI) MS Sahoo has indicated this same in an article written in the research journal of Indian Institute of Insolvency Professional of ICAI.
Sahoo says for the market to reward or penalise an insolvency professional based on his performance with respect to clawing back of value lost in fraudulent transactions, it is necessary that the market has the right information. The IPAs should disclose the performance of each IP in terms of detection, filing and success in clawing back of value lost in avoidance transactions.
According to Mr Sahoo, avoidance transactions could be a matter of life and death for a corporate debtor, and clawing back of the value lost through such transactions solely rests on the shoulders of insolvency professionals as no one else other than the IPs can file such an application.
Sahoo, therefore, argues that efforts of IPs in such matter should not be half-hearted, and the approach should not be that of a tick-box approach.
“IPs must not take shelter under the non-cooperation from the CD, statutory auditors or CoC, or even inability of forensic auditor, to hide his/her own inefficiency or hesitancy,” he says.
Inadequate Performance of IPs
Mr Sahoo has pointed out instances where some IPs don’t discharge their responsibilities effectively.
He cited the example of Surat Fabrics (Textiles) Mills Ltd., where the resolution professional filed an application for fraudulent transactions on 389th day of the CIRP. He filed this application after filing the application for approval of the resolution plan. “He did not make any determination; merely relied on the forensic auditor’s report and did not give independent reasons for determination of preferential transactions,” he writes in his article.
He also pointed out the issue of the quality of scrutiny of transactions by and the applications filed by resolution professionals.
In the matter of Renuka Devi Rangaswamy, RP of Regen Infrastructure and Services Pvt. Ltd, the NCLT dismissed an application in respect of fraudulent trading, saying that the RP miserably failed to prove the dishonest intention of the corporate debtor to defraud the creditors.
Sahoo says there is a tendency to consider a transaction to be simultaneously preferential, undervalued, fraudulent and extortionate and file an application to avoid that transaction.
“The scope of inquiry, the ingredients, and the consequences are different for each of these transactions. For example, intent is not material for preferential transaction, while it is material for fraudulent trading. The beneficiary gives up the benefits in case of former while the persons responsible are liable,” says Mr Sahoo.
Incidences of avoidance transactions
The insolvency professionals have so far reported Rs 2.3 lakh crore worth of fraudulent transactions by promoters of companies undergoing Corporate Insolvency Resolution Process (CIRP).
According to the quarterly newsletter published by the Insolvency and Bankruptcy Board of India (IBBI), 809 transactions of fraudulent nature have been reported by the resolution professionals so far till September 2022 totaling about Rs 2.3 lakh crore. Of the 809 such transactions, 98 transactions involving Rs 18,155 crore have been disposed of, leading to claw back of Rs 64.33 crore.
Also Read: Srei Equipment Finance reports Rs 1,500 cr more fraudulent transactions
