Insolvency Code: Need stricter norms to keep out crooks

A recent ordinance – introducing Section 29A in the Insolvency and Bankruptcy Code (IBC) – debars promoters declared ‘wilful defaulters’ of companies facing bankruptcy proceedings to bid for the stressed assets. This legal initiative has come not a day too soon. Clever operators who had stripped their companies and misused loans have been regaining control through legal bidding, and getting rid of mountains of loans owed to lenders to boot.

Applicants bidding for companies facing insolvency proceedings have to now provide details of “convictions, disqualifications, criminal proceedings, and categorisation as wilful defaulter as per RBI guidelines….” The objective is to ensure the same of bunch of crooks don’t gain control by floating shell companies or other routes.

The Hirco Case

ample this: Last year a group of nearly 1,000 flat buyers in a Niranjan Hiranandani project, part of a 588-acre layout in Panvel, near Mumbai, complained to the government that they had been cheated by the developer. The layout was part of a non-processing area of a SEZ layout which did not allow ‘sale’ of flats; the developer countered that the flats were ‘leased’ and not ‘sold’.

The earlier history reads like a Hollywood thriller: In 2006, Hiranandani floated an investment company called Hirco plc and raised $400 million on London Stock Exchange’s Alternative Investment Market (AIM). The funds were ploughed into the Panvel project and another 235-acre residential project in Chennai. Following the 2008 meltdown, both projects, after collecting crores from flat buyers, stalled. A dispute in the Hiranandani family muddied the water further.

Niranjan Hiranandani then resigned from Hirco in 2010 even as the Hirco investors – various funds from Canada and the US – continued to make claims on him. Meanwhile, the banks and other lenders took Hirco to the cleaners; and the two unfinished projects were put on the block to recover the lenders’ dues. In the auction, Niranjan Hiranandani made a comeback through his company Persipina Developers, buying out Hirco for around Rs 1,000 crore.

The banks took a haircut, and Hiranandani regained clean title. To the flat buyers in the Panvel project who claimed they had been cheated for having been ‘sold’ ‘leased’ flats, Hiranandani washed his hands off the fraud on the plea he had resigned from Hirco in 2010. Given the background, should Hiranandani have the legal and ethical right to come back as ‘owner’ of the Hirco projects?

‘Honest’ defaulters?

There has been a howl of protest in corporate circles that the tough Insolvency Ordinance shuts out even ‘honest’ promoters who were often ‘victims’ of a downturn in the market. Spokespersons for companies dragged to the National Company Law Tribunal (NCLT) have been shouting from roof tops that under the norms it is virtually impossible for the promoters to stage a revival package.

The small and medium enterprises (SMEs) are even more strident. Most of the companies before the NCLT like Hind Motors REI Agro and Gujarat NRE Coke are sure to face liquidation as there are hardly any third-party rescue packages. Where promoters of these SMEs have come forward with restructuring plans, the creditors have shot them down. Besides the promoters and companies going bust, there is the social concern of a large number of job losses.

While the ordinance – introduced as Section 29 A to the Insolvency Code – applies only to ‘wilful’ defaulters and genuine restructuring by original promoters is permitted under the IBC, those who have defaulted repeatedly deserve no tears. Indian state-owned banks are sinking by the day because of a mountain of stressed loans, estimated at 12 percent of their portfolio. These have doubled over the past 2-3 years to a whopping Rs 8-10 lakh crore.

The defaulting companies don’t deserve a second chance as they face liquidation after squandering a dozen chances. They have misused bank funds, or like Bhushan Steel and Kingfisher Airways, bent rules and corrupted officials. Precious funds have been frittered away because of bad business decisions or have been siphoned off.

There is no case for rolling back the new Ordinance. In fact, it should be made stricter and more effective. Banks are not running a social service for corporate losers. Even if the bankrupt promoters are ‘honest’, they have played with public funds and lost. They probably have no business acumen and will lose again. The rules of capitalism do not allow bad businesses to survive. It is best such companies go to the graveyard so that something new and more creative takes their place.

(The writer can be contacted at gurbir1@gmail.com)