While creditors handhold bankruptcy resolution and recover debt from rescue packages, dubious pre-bankruptcy deals are building up a mountain of claims in the background.
Creditors' claims on shady transactions done right before bankruptcy admission are approaching ₹4 trillion, data from the insolvency regulator showed, matching what they have so far realized through bankruptcy courts in the last 10 years.
Banks are trying to reverse ₹3.97 trillion worth of questionable transactions executed by former promoters and executives before companies formally entered bankruptcy proceedings, latest data from the Insolvency and Bankruptcy Board of India (IBBI) showed. The amount compares with the ₹3.99 trillion that creditors actually recovered through debt resolution or settlement since the inception of Insolvency and Bankruptcy Code (IBC) in 2016. In the September quarter alone, 128 such claims seeking reversal of transactions to recover close to ₹7,200 crore were filed in the bankruptcy courts. Since September 2024, over ₹20,700 crore of such claims have been filed.
The data highlights an aggressive pursuit by lenders to claw back funds and maximize the resources available for bankruptcy rescue. However, the recovery rates point to the difficulty on the ground - creditors could recover only ₹7,931 crore from 368 transactions till March 2025, out of the 1,396 petitions filed before tribunals. At the end of September, 1,570 cases were filed.
The IBC requires resolution professionals to review transactions of the corporate debtor during the statutory look-back period and approach the National Company Law Tribunal (NCLT) for recovery from preferential, undervalued, fraudulent or extortionate (PUFE) transactions, said Surendra Raj Gang, partner, deals - debt & special situations at Grant Thornton Bharat LLP.
"Such transactions by erstwhile promoters and directors of the bankrupt business can be seen as one of the primary causes of its financial distress. Besides, companies are more prone to such transactions during the pre-bankruptcy period of financial distress," said Gang.
PUFE transactions include fund diversions, alienating assets at a significantly lower value, preferring to repay certain creditors over others just before bankruptcy, and entering into financial arrangements with harsh repayment conditions.
Usually, by the time bankruptcy proceedings are admitted, the assets of a distressed company tend to get dissipated, making recovery from avoidance transactions a challenge, explained Anoop Rawat, national practice head (insolvency and restructuring) at law firm Shardul Amarchand Mangaldas & Co. Besides, NCLT benches are over-burdened.
"Making recovery from avoidance transactions requires extensive work to establish the trail of transactions and examination of evidence, which tribunals are not precisely designed for. Also, further legislative clarity is needed about pursuing recovery from avoidance transactions, once a resolution plan is approved and implemented as these are separate proceedings," added Rawat.
While there is no company-specific PUFE claim data readily available, case laws suggest that claims have been significant and often became the subject of litigation. In the case of Dewan Housing Finance Corp. Ltd, for example, the total amount involved in the avoidance applications before NCLT was about ₹45,050 crore. DHFL was acquired by the Piramal Group under a court-monitored debt resolution plan. The Supreme Court in April this year brought clarity on distributing the proceeds of amounts to be realized from avoidance transactions, specifying which amount goes to creditors and which to the acquirer.
"One challenge in the quick disposal of resolution professional's claims around PUFE transactions is the limited judicial capacity of NCLT compared to the case load. It is crucial for resolution professionals to make sure their claims are backed by thorough assessments for effective recovery from these transactions," Grant Thornton Bharat's Gang said.
On 10 October, Mint reported that the government is working with the IBBI to find ways to identify and examine such transactions more thoroughly, in an effort to reverse them and recover the money. Earlier in July, the bankruptcy regulator mandated resolution professionals to disclose such transactions in the sale prospectus of the bankrupt business they are overseeing, for more transparency and better price discovery.
Mortgage of large land parcels of Jaypee Infratech Ltd in Uttar Pradesh to some lenders was the subject of litigation around avoidance transactions, according to Supreme Court documents. In the September quarter, 42 businesses were brought out of bankruptcy under the IBC process, data showed.
Till now, 1,300 companies have been revived under IBC, out of the 8,659 companies against which insolvency proceedings were initiated, enabling creditors to recover ₹3.99 trillion.
The government has been constantly refining the bankruptcy code to suit the changing dynamics of the economy so that entrepreneurs and lenders find it easier to make exits without a stigma where a business is unviable. Currently, a bill to reform IBC is being reviewed by a select committee of Lok Sabha.