[NPAs and Bad Loans] Union can do a lot of good if it steps in at the right time: Madras High Court

The hearing of a petition proposing solutions to combat the issue of Non-Performing Assets (NPAs) by invoking provisions of the Companies Act, 2013 saw the Madras High Court orally remark on Tuesday that the Central government has the potential to do a lot of good if it steps in at the right time (Siddarth Govind v. Union of India and ors). .In response to submissions made by the petitioner's counsel concerning the case against Videocon, whereby the National Company Law Tribunal (NCLT) is stated to have written off a substantial part of the company's debts of around Rs 43,000 crore, Chief Justice Sanjib Banerjee recalled that cautionary notes were sounded on the issue in orders passed years ago. ."From 2010 onwards, you will find the prediction in those orders about that particular bank and its high-flying personnel," he said..He went on to comment,"Here, the Centre should step in. It has a wonderful SFIO...The Union can do a lot of good it it steps in at the right time.".Representing the Centre, Additional Solicitor General R Sankaranarayanan responded that while in several cases the Serious Fraud Investigation Office (SFIO) has stepped in, many such proceedings were stayed by courts. .Chief Justice Banerjee also noted that it is not as if the law has fallen short in such matters."There are wonderful provisions. The law is not short. Implementation of law is short. We had provisions like Section 408 (regarding oppression and mismanagement) in the old Act (Companies Act, 1956)… government has power to take over the board of public company (if there is oppression and mismanagement). 'Mismanagement' is of wide import...", he observed..Appearing for the petitioner, Advocate Nithyaesh Nataraj highlighted Section 237 of the Companies Act, 2013, which allows the Centre to amalgamate companies in public interest. This provision can be invoked as a measure to salvage the situation and recover public money where a default has occurred, has argued. .In the NSE co-location scam case, the Centre had invoked this provision, although the Supreme Court negated the amalgamation, Advocate Nataraj recalled.He also pointed out that in many cases, certain companies are set up as vehicles to perpetrate fraud, while the promotors of these entities continue to hold sizeable assets through other companies. .The petition filed in 2018 had explained that subsidiary companies "with little or negligible net worth" are set up to take loans. Once a default occurs, the promoter and holding companies waive responsibility by taking recourse to the much abused limited liability concept in company law, the petition stated. This can be tackled by amalgamating such companies through Section 237 of the Companies Act, it was contended..Advocate Nataraj argued on Tuesday that there are also provisions in the Companies Act enabling the disbarment of directors and to ensure that they disgorge ill-gotten wealth. "If there is an opportunity to recover these monies, it is not something that should be brushed under the carpet... If the Union cooperates, they can ensure the monies can be recovered," he submitted. .ASG Sankaranarayanan agreed that legally speaking, the cited provisions of the Companies Act can be invoked in such cases and have been invoked in the past. However, he sought some time to gather details on status of some companies that were undergoing insolvency and bankruptcy proceedings. .The matter was, therefore, adjourned by four weeks by the Bench of Chief Justice Banerjee and Justice Senthilkumar Ramamoorthy. .The case concerns a petition filed by Advocate Siddarth Govind in 2018, which calls for the Court to direct the Central government to initiate amalgamation proceedings under Section 237 of the Companies Act, 2013 against in relation to five defaulter-companies - Essar Steel India ltd., Videocon Industries Ltd, GVK Gautami Power, Kingfisher Airlines Ltd. and Electrosteel Steels Ltd..Highlights of the petitioner's contentions include:.While group companies may turn NPA, their associate/affiliate companies may be financially very sound and stable. The usual practice is to write off these loans as bad debts. However, when public monies are involved, the Court should exercise its inherent jurisdiction to ensure that public monies are not written off arbitrarily. Corporate houses defaulting in repayment to banks has been plaguing the executive and judicial system for a long time. The recovery mechanism provided under the SARFAESI Act, 2002 and the Recovery of Debts due to Banks and Financial Institutions Act, 1993 have proved to be extremely ineffective. When a default occurs, the banks and financial institutions find it difficult to proceed against the promoter/holding companies on account of the bar on lifting the corporate veil unless it is established through judicial process that the holding/promoter company set up the defaulting subsidiary company as a vehicle to defraud the banks. This is a problem plaguing not only the banking industry but also the Income Tax Department. Various companies that owe taxes to the government cannot be proceeded against because of the same limited liability concept and because the companies which owe monies have no money to pay whereas their promoters and holding companies have sizeable wealth. Even though criminal prosecution may be initiated by the Income Tax Department against the directors of the delinquent company, the chances of money recovery are very dim. The funds which have been siphoned off belong to the honest working class in India. The problem of mounting defaults and bank NPAs is a very serious threat. An inherent remedy to the problem which the Union of India seems to have ignored under Section 237 of the Companies Act, 2013, which empowers the Centre to amalgamate companies in public interest. The Union of India has not used this power despite mounting defaults by corporate houses with banks and statutory authorities. Since there is considerable public interest in defaulting of banks loans, the Union of India must exercise such power. .In this backdrop, the petitioner had prayed that the Court direct the Union Ministry of Corporate Affairs to initiate amalgamation proceedings against the five entities listed in the petition as per Section 237 of the Companies Act, 2013. .The petitioner had also called for an SFIO probe into the defaults committed by these entities. .The matter will be heard next on July 20. .[Read Order]