INSOL International, New Delhi: does Instagram make asset tracing easier?

Is the current class of unscrupulous businessmen and women worried more about likes than the law? At INSOL International’s first in-person event in India since the start of the covid pandemic, practitioners discussed cross-border asset tracing in India and whether discretion is a dying art among fraudsters.

WongPartnership partner Smitha Menon moderated the discussion, which looked at India’s tentative moves towards the adoption of the UNCITRAL Model Law on Cross-Border Insolvency and the alternatives available in the meantime.

Menon asked a panel comprised of Grant Thornton partner Nick Wood from London, and KPMG partner Anuj Jain and Samvad Partners partner Aparna Ravi both from New Delhi, whether fraudsters’ apparent lack of discretion on social media platforms – posting photos flaunting their ill-gotten gains – had made asset tracing easier than ever.

Jain said he would put it “differently” and that the proceeds of fraud were being shared by a greater number of people, who were all too keen to show off on social media.

Bragging on social media can not only incriminate careless fraudsters but can also trip up their more seasoned counterparts, Wood said. “We were chasing this one guy down; he didn’t have any social media and his wife didn’t have any social media – but his kids were all over it. One of the photos was ‘me in front of my dad’s yacht’.”

While discretion may be a thing of the past, asset tracing remains the same as ever, Wood added. Practitioners simply have to “follow the money” by starting up a Chapter 15 proceeding or subpoenaing US clearing banks for the last 10 years of transactions a suspicious entity or individual has made – offshore jurisdictions typically transact in dollars – and combing through their records for patterns.

“Sometimes [you’ll] need a bit of human intelligence to tract assets down,” Wood said. “They’ll be held through BVI, Cayman, etc, entities – but that’s what the lawyers are for.”

Too much risk?

Underscoring the importance of asset tracing, Menon pointed to a report by Singaporean newspaper The Straits Times revealing that the Indian banks had written off more than INR 10 trillion (US$121 billion) in bad loans over the last five years.

To gain some insight into why Indian banks seemed reticent to pursue debtors, Menon asked the panel about the bankruptcy of India-headquartered jewellery manufacturer Winsome Diamonds. Despite an English court expressing the view there was strong evidence of international fraud, 14 Indian banks refused to participate in litigation against the company, she said.

Former INSOL International president Sumant Batra, who was sitting in the audience and advised on the case, clarified that decrees were obtained in foreign jurisdictions – Batra said he did not want to go into the specifics of them, although he said they were enforceable – but the banks were ultimately ambivalent on the merits of further litigation as there was no “underlying asset to recover”.

“In Asia, banks are extremely conservative – sometimes their reasons are inscrutable,” Menon said. “If you start from the fact that you’ve written off the debt it’s hard to justify internally why you’re going to take further steps.”

Wood suggested that issue was actually a global one not just an Asian one, as banks are typically concerned about risk, regulatory compliance and reputational damage from lengthy litigation. “What I say to [banks] is… you either sit on [claims] and do nothing until its time-barred or you give it to professionals who will get funded, and you can sit back and get a return further down the line.”

Jaypee Infratech

Moving the discussion towards examples of “solid” value recovery, Menon asked Jain to walk the panel through Indian property developer Jaypee Infratech's insolvency filing.

Jain acted as the court-appointed insolvency resolution professional for Jaypee Infratech and secured the return of 759 acres of land to the company’s estate. India’s Supreme Court found in 2020 that the transfer of the land, pledged to Jaypee’s parent company as security for loans, amounted to a preferential transaction under section 43 of India’s Insolvency and Bankruptcy Code (IBC).

Although avoidable transactions are recognised under the IBC, the success-rate of challenges against suspect transfers remains low, Jain said.

Quoting figures from up to September last year, Jain said that around 809 applications for avoidable transactions had been filed before the National Companies Law Tribunal (NCLT) in India with claims amounting to a total value of more than US$30 billion. But the value recovered so far stands at less than US$10 million, outside the Jaypee case.

He said there were “various reasons” behind the mediocre results, chiefly a lack of evidence and a hesitancy on the part of creditors to commit to the expense of uncertain asset tracing processes.

But Jaypee Infratech, which Jain excluded from the figures on avoidable transactions, bucked the trend of low-value recovery. “We were able to recover a significant part of value back, not in the form of money but land… worth around US$700 million,” he said.

The process took just over two years from the initial filing with the NCLT to obtaining a final order from the Indian Supreme Court to recover the assets, he added.

“The most important part of this was we actually did not have any transaction audit in this case. It was purely going through the records… we were able to identify the transaction and go after it,” Jain said.

Despite being challenging to prove in court, Jain said the Jaypee case dispelled the pervasive myth in Indian insolvencies that forensic experts and transaction audits are necessary for any hope of value recovery. “We narrowed down on two or three transactions, and we were able to succeed,” he noted.

A member of the audience asked the panel whether it was possible for liquidators to sell creditors’ claims to liquidation companies.

Ravi said that, while it was possible, the market for claims against insolvent companies was limited because of bottlenecks in the insolvency process. “Liquidation funding as a concept hasn’t caught up very well,” she added.

Trades for insolvency claims in India were “mostly bilateral” Jain said as there was the lack of a “proper” market.

The “urgent need” for a viable cross-border framework

India and the UNCITRAL Model Laws on insolvency have a complicated history. Though the country launched a consultation process for its adoption of the Model Law on Cross-Border Insolvency in 2018, and consulted practitioners on the separate and relatively new Model Law on Enterprise Group Insolvency a year later, little has changed in India’s cross-border regime.

“At the time this panel was being organised, as a committee we did speculate whether by this point there would be an amendment [to the IBC] for the Model Law,” Ravi said.

Even without the Model Law, sections 234 and 235 of the IBC permits a limited degree of cooperation with foreign jurisdictions, she noted.

Section 334 empowers the central government to enter into bilateral agreements with foreign jurisdictions to resolve issues with cross-border insolvency and section 235 allows the adjudicating authorities to issue letters of request to foreign courts where an agreement under 234 exists.

“The biggest drawback of this is that it is ad-hoc, it really means it’s up to the parties in the specific case – and all the stakeholders – to come up with a protocol,” Ravi said.

To help contextualise the impact of India’s current regulatory framework, Menon invited Jain to elaborate on the “practical difficulties” faced by local insolvency resolution professionals (IRPs).

The increasingly global nature of businesses means that assets and capital are frequently held overseas, Jain said, so “there is an urgent need to have a cross-border framework that is viable and workable".

While the cross-border framework under the IBC does have those provisions for cross-border recognition, what IRPs needed were “more definitive protocols”, he told the panel.

One of the biggest challenges under the current recognition regime, Jain said, was the “time, money and effort” required to get protocols signed. In addition to balancing the demands of creditors and stakeholders, IRPs must also work with the Indian government on matters of diplomacy.

The “multiplicity” of foreign proceedings, each carried out in separate jurisdictions with their own discreet legal and systemic differences, further complicates cases, he said.

“Even after you’ve done the protocol its left to the parties to figure out how you want to run it, and that becomes very subjective – so even a basic set of rules and framework is not there,” the KPMG partner said.

He expressed confidence that India would, however, eventually become a signatory to the UNCITRAL Model Law.

Jain also said that India’s adoption of the Model Law for group insolvencies is as important as the general 1997 law on cross-border insolvency, given the number of cross-border filings where a company’s offshore holdings are held through a subsidiary group.

But tweaks to Indian law are just the start, Jain said, arguing that the country’s cross-border insolvency regime would also benefit from the government training a cross-border focused bench of judges to handle future cases.

“I can summarise by saying the current cross-border [regime] is a bit incomplete and time-consuming,” Jain added.

Even without a comprehensive set of rules on cross-border insolvency, practitioners have had successes in high-profile cross-border matters like Indian airline Jet Airways' insolvency.

Prior to entering insolvency in India, Jet Airways was already in liquidation in the UK and was also in bankruptcy proceedings in the Netherlands, where a trustee had been appointed. The practitioners appointed on the case worked out a protocol to recognise India as Jet Airways’ centre of main interest, Jain explained, which allowed the Dutch administrator to sit-in on Indian meetings and established clear lines of communication between office holders that limited independent action.

“IRPs are pragmatic people and we’re just trying to find a solution to issues as they come up,” Wood said.

Grant Thornton partner Ashish Chhawchharia, Jet Airway's IRP, worked with London colleagues to sign a protocol outside of the courts, Wood said.

“I don’t think the Model Law would have assisted there to be honest, the Model Law is there for consensual restructurings,” he added.

Menon asked why IRPs haven’t considered applying for recognition outside India when required, putting a question from the audience to the panel.

“I think if you went to the UK, you would get the recognition. I don’t see why not,” Wood opined.

Jain explained that insolvency practitioners often refrain from taking positions on a company’s board or taking control of international subsidiaries because they “very rarely” see unencumbered assets of value sitting overseas that it would make sense to pursue on a cost-benefit analysis.

Batra submitted that there were two reasons for IRPs' hesitance to apply for cross-border recognition. The first was the “fear of the unknown”, which he attributed to a lack of education, and the second was a concern on the part of practitioners that, as the Model Law is yet to be adopted, pursuing recognition abroad might upset the Insolvency and Bankruptcy Board of India as it could be seen as counter to government policy.

INSOL International’s New Delhi Seminar was held at Le Meridian Hotel in New Delhi on 3 February.

As well as cross-border asset tracing, the seminar featured panels on the evolution of the IBC since its introduction in 2016 and what the future of the Code might be; and on how insolvency practitioners could develop their profession for the benefit of all stakeholders.

Later in the day, Dechert partner Kay Morley from London also led a panel discussion on hot topics in insolvency field, focusing in particular on the role of mediation and new technologies.