IBC–Proper accountability – OPINION – The Hindu BusinessLine

Companies can’t be left scot free in IBC process

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, has been hailed by many as a paradigm-changing move, which paves the way for a smooth takeover by the new promoter of an insolvent company. A case that had brought up this issue was that of ArcelorMittal, which successfully bid for Essar Steel through the insolvency process, and had sought immunity from any future investigations pertaining to the company and its erstwhile promoters, the Ruia family.

The truth is all those successfully bidding in the IBC resolution process had been lobbying for clearing the decks for smooth takeover. The Bill also says all licences, permits, quotas, clearances, registration, concessions, etc., conferred on the company will continue despite the changing of hands of the controlling interest.

The moot question now is if the taxman, banks and financial institutions, State governments, etc., are to leave the new promoters as well as the ‘exorcised’ company alone, then how and against whom will they enforce their claims? On this, Finance Minister Nirmala Sitharaman confidently told Parliament that the erstwhile promoters would be responsible for their own and the company’s misdeeds as well as liabilities.

The Indian corporate history is, however, replete with instances of promoters running amok with their companies’ funds, while the government watches helplessly. The sordid sagas of the grounded Kingfisher Airlines and Jet Airways vividly come to mind. Mehul Choksi and Nirav Modi, promoters of Gitanjali Gems, too are thumbing their noses at the government and banks from distant shores.

The story of diversion of funds by company promoters is the same — give loans to a subsidiary or associate, which in turn gives a similar loan to another and so on in a labyrinthine route, till the trail fades away into a distant but convenient tax haven. The new trend that is also emerging is, soon after the funds, the wily promoters too disappear to foreign destinations.

In this event, Nirmala Sitharaman’s confidence is thoroughly misplaced. Furthermore, even if she is able to nab the erstwhile promoters, what is the guarantee they would cough up the loot? Like their former companies, they too would in all probability plead insolvency.

It is one thing to grant the new promoters immunity from criminal proceedings for the ignoble acts of their predecessors, but to completely absolve the company of any liability springing from the pre-takeover era will benefit no one. Should such a relief be granted to the company itself? The answer is no, for three reasons:

A company is a continuum or going concern. Its profile does not change with the change of promoters or management. Therefore, it simply cannot shrug off liabilities that might surface.

Amalgamation is the other form of company rehabilitation. Company law says the amalgamated company inherits all liabilities, actual as well as contingent, of the amalgamating company. They don’t just disappear or resolve themselves.

Assets and liabilities are two sides of the same coin, just like rights and duties. If all assetsof the new company go to a new promoter, all liabilities should too.

That burdening the new promoters thus would be a dampener in IBC-led resolution is a facile, self-serving specious argument that turns the time-honoured legal principles of continuity on its head. Spare the new promoters from criminality by all means, but do not throw the protective ring around the company — which might have been, for all we know, complicit in the crimes committed by the erstwhile promoter.

The writer is a Chennai-based chartered accountant