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Mountain of false claims tests bankruptcy process

Livemint |
Sutanu Sinha, Partner
Business Restructuring Services

07 September 2018

In the case of ABG Shipyard, one of the companies referred to bankruptcy courts, the percentage of claims made by operational creditors that were rejected stood at a staggering 90% of the total claims

Finding a buyer for indebted companies is tough, but going by the experience of bankruptcy resolution professionals, the tedious task of verifying thousands of claims—many fictitious—made by operational creditors is even more arduous.

In the case of ABG Shipyard, one of the companies referred to bankruptcy courts, the percentage of claims made by operational creditors that were rejected stood at a staggering 90% of the total claims.

Sutanu Sinha, the resolution professional for debt-laden IVRCL Ltd, had to reject many claims filed by operational creditors as records of those could not be found on the company’s books.

“Going through thousands of operational creditor claims to verify their authenticity by tallying them with the company’s records is a tedious process and we are putting in a lot of effort to ensure that all bona fide claims are admitted,” said Sinha, who admitted just ₹1,234 crore of ₹3,420 crore in operational creditor claims.

Operational creditors are those that are seeking to recover their dues with respect to goods or services that they have provided to the company. Claimants are supposed to submit proof of their dues along with their claims, following which the resolution professional verifies them. If discrepancies are found, the claimant is informed and given time to respond.

Unsubstantiated claims are a widespread phenomenon. Among companies admitted to the National Company law Tribunal (NCLT), including Alok Industries, Essar Steel, Ruchi Soya and Coastal Projects, operational claims that were rejected range from 9% to 90%.

Sumit Binani, an insolvency resolution professional, said he has come across quite a few fictitious claims. Binani is the resolution professional for Monnet Ispat and Adhunik Metaliks. “Resolution professionals cannot be considered as adjudicators as we are not the means to settle disputes and arbitrations arising out of these claims,” he said. “Only the documents he has can prove that the company owes him money.”

According to Sinha, lack of supporting documents leads to the highest number of rejections. In certain cases, even if some claims are bona fide, they are rejected because of lack of proof, he added.

“While there are fake claims against forged documents, some genuine creditors also face hurdles because companies have not recorded the transaction on their books,” Sinha said, adding that apart from managing the finances and day-to-day activities of the company, decoding claims and admitting them is perhaps the most difficult task for the resolution professional.

In Alok Industries’ case, for example, the claim admitted was lower than what was claimed because enough information was not available. “Amount admitted to the extent of available information and details,” said Ajay Joshi, the resolution professional, in his notes to the claim document of the company.

Experts also pointed out that the Insolvency and Bankruptcy Code leans more towards secured financial creditors, while operational creditors have been unfairly treated under it. While the resolution applicant decides how much operational creditors will get if there is a resolution, they lose their dues in case of liquidation.

Lawyers Mint spoke to said these rejections are leading to operational creditors taking legal recourse to protect their interests. “We are seeing an increasing trend of operational creditors challenging the rejection or part-rejection of their claims,” said Ankita Singh, co-founder of law firm A&P Partners.

Singh added that when claims get rejected, many operational creditors approach the resolution professional and NCLT and, subsequently, the National Company Law Appellate Tribunal. “However, the law is very clear and, hence, it is very difficult for them to get the full claim approved if the documents and invoices are not in place.”

Others believe the recent trend of rejection of claims by resolution professionals is mostly due to ambiguity and, at times, lack of understanding on the part of the professionals, as the law is still evolving.

“The rejection of a claim just because it is from a related party is incorrect, as it will be a dereliction of duty on the part of the RP. They are entitled to make claims,” said Ashish Pyasi, an advocate with law firm Dhir and Dhir Associates. “However, their rights and participation is limited.”

Emailed queries to the resolution professionals of Alok Industries, Essar Steel, ABG Shipyard, Ruchi Soya and Coastal Projects did not elicit any response till press time.