Save the bankruptcy code

One of the few high-profile successes of the Insolvency and Bankruptcy Code (IBC) has been the sale of Bhushan Power & Steel Ltd (BPSL) to JSW Steel. Yet even this has had a spanner thrown in the works by the recent attachment of BPSL assets by the Enforcement Directorate (ED), the investigative agency that reports to the Union Ministry of Finance. It is concerned that BPSL might have violated the Prevention of Money Laundering Act (PMLA). It cannot be anyone’s contention that due investigation should be stopped. Certainly, if criminal acts have been committed, then those responsible should be brought to justice. But the attachment of property in the course of an investigation cannot be indiscriminate. In this case, given that BPSL was in the final stages of its sale to JSW, the attachment has effectively derailed the IBC process, which also carries the force of law. It is unsurprising, therefore, that the National Company Law Appellate Tribunal has asked the finance and corporate affairs ministries — the latter being the ministry responsible for the bankruptcy process — to sort out their differences.


Such differences should never have been allowed to arise. It is inexplicable that an agency under the finance ministry is unaware of the importance to the broader economy of the successful functioning of the IBC process. For both restoring banks to health and reviving broader investment in the economy as well as unlocking stalled capital, the IBC process is the only game in town. But it is unfortunate that the ED may once again have attached processes without applying its mind. Such behaviour has had systemic effects before, notably after the attachment of bank properties following the revelation of fraud at Punjab National Bank. Last month the PMLA Tribunal accused the ED of “inadequate investigation” of that case and that it attached the property of a consortium of banks involved in a “mechanical” manner. The tribunal also pointed out that such attachment stalled the recovery process for banks. Even so the ED seems to have learned no lessons.


The government has responded swiftly and with efficiency in the past to preserve the integrity of the IBC process. Whenever necessary, swift amendments or even ordinances have been used to keep the system moving. Such action may be required again. The finance ministry, which is surely aware of the importance of IBC, may take the lead. Essentially, no bidders will be found for companies through the IBC process if even after the NCLT approves of the takeover a further legal liability can stall the process. It will also put banks in a tight spot because they will not be able recover loans if the promoters or the management is investigated for a fraud. Once the company changes hand after going through the bankruptcy process, it should be able make a fresh start. In the case of a fraud, promoters and management can be prosecuted separately.    


If the two ministries and their agencies cannot get their act together in terms of implementation — in spite of sharing the same Cabinet minister — then the laws will have to be amended in such a way that the IBC is given priority once the NCLT has ruled or the process has gone beyond a certain stage. If necessary, the Prime Minister’s Office should enforce co-ordination and speedy action.

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