ED flags bankruptcy code frauds, 'disproportionate' haircuts as thrust areas, Pg1

Key Highlights:

• The Enforcement Directorate (ED) has identified frauds under the Insolvency and Bankruptcy Code (IBC), particularly "disproportionate haircuts" and promoters re-acquiring assets, as a key thrust area.
• This focus emerged from the ED's 36th Quarterly Conference of Zonal Officers held in Bengaluru.
• The ED highlighted recurring malpractices such as circumvention of Section 29A of the IBC, inflation of related-party claims, and manipulation of the Committee of Creditors (CoC).
• The move follows a National Company Law Tribunal (NCLT) order allowing Essel Group founder Subhash Chandra to settle personal insolvency for ₹6.25 crore against admitted claims of ₹22,006.57 crore, which was later stayed.
• Average recovery for creditors under IBC between FY2021-22 and FY2025-26 was about 29% of admitted claims, with recovery falling to 20% in FY26, the lowest in five years.

Detailed Insights:

• The ED's concerns stem from instances where companies allegedly use the IBC to evade prosecution, with related parties sometimes regaining control through the resolution process.
• The agency noted a legal tension between the moratorium under Section 14 and immunity under Section 32A of the IBC versus its attachment powers under the Prevention of Money Laundering Act (PMLA).
• Zonal officers of the ED have been directed to identify red flags, obtain details of preferential or fraudulent transactions, file intervention applications with the NCLT, and initiate independent PMLA investigations.
• The central debate around the IBC revolves around its primary objective: whether it should prioritize reviving distressed companies or maximizing creditor recovery.
• Banks have expressed concerns regarding asset valuation methodologies, inadequate accounting, and opacity, which can lead to excessive "haircuts" for creditors.

Key Concepts Involved:

• Insolvency and Bankruptcy Code (IBC): A 2016 law providing a unified framework for time-bound resolution of insolvency and bankruptcy for companies and individuals.
• Prevention of Money Laundering Act (PMLA): An Act enacted in 2002 to prevent money laundering and confiscate property derived from illegal activities.
• National Company Law Tribunal (NCLT): A quasi-judicial body established under the Companies Act, 2013, to adjudicate matters related to Indian companies, including insolvency.
• Section 29A of IBC: A provision that disqualifies certain individuals, including defaulting promoters and wilful defaulters, from bidding for their own companies during insolvency.