While the frequent amendments to make the Insolvency and Bankruptcy Code, 2016 effective is laudable, it is imperative to prevent companies from becoming non-performing assets (NPAs) and eventually undergo Corporate Insolvency Resolution Process (CIRP).

In general, the events that turn an entity in an NPA are: (i) non-payment/remittance of statutory dues collected, as the monies are utilised to tide over a temporary cash crunch; (ii) when the cash crunch worsens, the snowballing effects starts, with borrowing outside the banking system at exorbitant rates, default in payment of dues to banks, etc.; and (iii) to hide all the financial mess, further defaults are committed by the companies, which include not getting the books of account audited, not filing with the Registrar of Companies (RoC), non-filing of ITR and tax audit reports, etc.

On July 1, 2016, the RBI issued a ‘Master Directions of Frauds’ that specified a list of 45 Early Warning Signals (EWS) to identify possible risks in a loan account in advance.

It must be noted there are other more grevious signals that require swift and stringent actions by banks. The ‘action required signals’ (ARS) include: non-filing of audited stand-alone and consolidated accounts; non-filing of Annual Performance Reports, non-remittance of money from foreign subsidiaries, if those investments were funded by banks; huge borrowings, say more than 10 per cent, above the credit limit assessed by the consortium/sole lender(s); non-remittance of statutory dues like GST, TDS, PF, ESI collected/deducted, etc., continuously for a quarter; and non-submission of copy of the Statutory Register as stipulated under the Companies Act along with Fixed Asset Register to banks at the end of each quarter.

The necessity of ARS emanates from the facts that in many CIRP companies, these issues are common and have been prevailing for many years. In the absence of audited accounts, banks are clueless regarding the financial position, including details on fixed assets of those companies. While outside borrowing, apart from the sanctioned limit, temporarily for a genuine emergency is acceptable, if the amount exceeds 10 per cent of the limit and that too for longer duration, it necessitates investigation.

Non-availability of accounts and Fixed Asset Register for many years have serious implications in the IBC process. These include: lower valuation of the company as the correct assets and liabilities of the company is unknown; the day-to-day operations of the company gets affected post CIRP , as the ‘payables and receivables’ are not known; Expressions of Interest are either not forthcoming to revive the companies or even if received, they are for a lower value due to non-availability of information, defeating the very objective of IBC — value maximisation, that is; post commencement of CIRP, the transaction audit initiated by the Resolution Professional becomes a futile exercise due to non-availability of audited accounts for many years and ultimately helps the promoters to bury all their financial misdeeds.

The key deterrents for successful implementation of ARS are “Disjointed Regulators and disintegrated Portals”. Dismantling that barrier is imperative, since, currently, even if a property is attached by the income tax/PF authority, the same is not known to other regulators/lenders . Hence, it is important that the portals of the regulators — Ministry of Corporate Affairs, IT, GST, MSME — are linked through a common Corporate Identification Number (CIN), assigned by the RoC, and also seamlessly linked to the banking system.

Bad practices

It is not uncommon to find companies file audited accounts without schedules, auditor’s and/or directors’ signatures, notes on accounts and report of the auditors, with the RoC. IT returns are filed with zeros in all columns, since the portals check whether the relevant columns are filled in and not the accuracy of the data. The companies that adopt these methods are mostly NPA accounts. The NPA data of the banks should be shared with the IT department and the RoC periodically to help them to probe those companies deeper and take appropriate actions.

If anyone of the ARS is triggered, MSME status, if any, for the company should be immediately withdrawn and the same should reflect in the all the portals. For this, the master data format in the MCA portal also should be amended. Once MSME status is withdrawn , all the concessions will go and a higher rate of interest should be charged by banks.

If PF/ESI/TDS returns are not filed and deductions are not remitted for a continuous period of three months, they should be empowered to issue garnishee order to the lending banks of those companies and lending banks should honour and remit the dues. These steps will assure compliance, help employees get their dues, and prevent litigations by the regulators during CIRP to get their dues.

The writer is an insolvency professional

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