IBC's weak spot: Slow, difficult recovery from dubious pre-bankruptcy deals

Mint

14 hours ago

New Delhi: Companies on the brink of collapse tend to do certain transactions that benefit the promoters or close partners but are detrimental to the organization and its creditors. While such 'dubious transactions' can later be set aside during bankruptcy proceedings by tribunals, getting the money back is proving an uphill task.
Data from regulator Insolvency and Bankruptcy Board of India (IBBI) reviewed by Mint showed that in FY25, just ₹1,322 crore or a tenth of the amount involved in 'avoidance transactions' disposed of by tribunals were recovered. And overall, just 12% of the ₹65,650 crore worth voidable deals executed by promoters and management of 368 companies–and where tribunals have given their verdict–were recovered, according to IBBI.
Such deals could include paying off a friendly creditor just before bankruptcy proceedings while ignoring others, moving assets to related parties or hiding them, selling assets for less than they're worth, or taking loans on unfair or excessive terms.
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'There is often misconduct by earlier management pre-insolvency and it might be a reason for the insolvency in some cases," said Dhananjay Kumar, partner (head-insolvency and restructuring) at law firm Cyril Amarchand Mangaldas. 'Recovery of such amounts is a fundamental function of a law like IBC (Insolvency and Bankruptcy Code)," added Kumar.
Other challenges pointed out by Kumar include lack of data to challenge these transactions, lack of funds with resolution professionals, and slow movement in National Company Law Tribunal (NCLT).
The matter assumes significance because money recovered from dubious transactions adds to the pool of resources available for a corporate restructure plan. According to IBBI's estimates, on a conservative scale, a decision on avoidance transactions by tribunals would add recovery to creditors by at least 10%.
Yogendra Aldak, partner at Lakshmikumaran and Sridharan Attorneys, said the high amounts being flagged as avoidance transactions highlight an alarming trend of promoters deliberately using such transactions 'to deprive a company of its resources for self-serving purposes leading to a snowball effect during times of stress".
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Further, Aldak said IBC has not been designed as a debt-recovery machine and, instead, prioritises resolution of distressed companies. So, to avoid delays in rescuing businesses, taking decisions on avoidance transactions has been kept independent of corporate debt resolution.
However, this makes it hard to recover money from avoidance transactions. For example, only deals made within two years before the insolvency process can be reviewed, which means many questionable transactions are never examined, Aldak explained. Another problem, he said, is tracking the money, as it is often moved through shell companies or hidden in other countries, making recovery even harder.
Anisha Jhunjhunwala, senior consultant-IBC at NPV Insolvency Professionals Pvt. Ltd, said that despite clear evidence, enforcing clawbacks from avoidance transactions is a lengthy legal battle, with promoters delaying proceedings through litigation, and tracing diverted assets is complex, especially when routed through layers of related entities or parked overseas.
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'The high quantum of flagged transactions reflects serious lapses and, in some cases, wilful misconduct by promoters, particularly during the twilight period before insolvency," said Jhunjhunwala. 'It shows that promoters, anticipating distress, often prioritize asset stripping over stakeholder interest, highlighting the need for stricter pre-insolvency oversight and faster adjudication timelines."
The fact that it often takes considerable time for a bankruptcy petition by a creditor to be admitted in a tribunal only allows more time for such unscrupulous activities to take place.
Till the end of March 2025, close to 1,200 bankrupt enterprises have been restructured under IBC and their creditors got the chance to recover ₹3.89 trillion or about a third of their admitted claims. This is in addition to proceeds from companies liquidated and the recoveries made by lenders who struck settlement deals with corporate borrowers before tribunals initiated insolvency proceedings.
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