Explainer: The IL&FS Insolvency case

Bar & Bench July 21 2019
IL&FS

Shashank Pandey

IL&FS, India’s leading infrastructure finance company, defaulted on payment to lenders, triggering panic in the market. The dues stand at more than Rs. 91, 000 crore.

In this article we will try to trace the major events of the IL&FS insolvency case.

What is IL&FS? 

Infrastructure Leasing & Financial Services Limited (IL&FS) is a systemically important Core Investment Company with the Reserve Bank of India and is engaged in the business of giving loans and advances to its group companies (and holding an investment in such companies). IL&FS has a large number of group companies across various sectors such as Energy, Transportation, Financial Services etc. IL&FS was initially promoted by the Central Bank of India, HDFC Limited and the Unit Trust of India. 

The shareholding pattern of IL&FS as on March 31, 2017, as derived from the Annual Report of the company for the year 2018 is as follows:

IL&FS Group, which has approximately over Rs. 91,000 crores in debt, is facing a severe liquidity crisis. Between July 2018 and September 2018, two of the subsidiaries of IL&FS Group reported having trouble in paying back loans and inter-corporate deposits to banks/lenders.The liquidity crisis in IL&FS Group - Role of Central Government

In July 2018, the road arm of IL&FS was facing difficulty in making repayments due on its bonds. Further, in early September 2018, one of the subsidiaries of IL&FS Group was unable to repay a short-term loan of Rs. 1,000 crore taken from Small Industries Development Bank of India (SIDBI). Also, certain group companies defaulted in repayments of various short and long-term deposits, inter-corporate deposits, and commercial papers.

IL&FS failed continuously to service its debt and the imminent possibility of a contagion effect in the financial market led the Central Government to move an application under Sections 241 and 242 of the Companies Act, 2013 before the NCLT, Mumbai Bench.

It sought the immediate suspension of the Board of Directors of IL&FS and the appointment of specified new directors, on the ground of massive mismanagement of public funds by the erstwhile Board. It was also alleged that the affairs of the company were being conducted in a manner prejudicial to the public interest. 

Suspension of existing Board of Directors (NCLT order)

By way of an order dated October 1, 2018, the NCLT invoked its powers under Sections 242, 242, 246 r/w 339 of the Companies Act and granted the interim prayer of suspending the existing Board of Directors and reconstituting the same with the six persons proposed by the Centre.

The NCLT further restrained the suspended members of the Board from alienating their personal assets. Mr. Uday Kotak is the chairman of the new Board of Directors. The new Board has been tasked with the orderly resolution of IL&FS and its group companies.

The NCLT also directed the filing of progress reports until resolution, which is a continuous process.

Through subsequent orders, the NCLT allowed the appointment of three additional directors, bringing the total number of directors to nine.

Grant of immunity to new Directors (NCLT order)

In order to ensure the independent functioning of the said directors individually and collectively, immunity was granted to them. The NCLT directed that for the past actions of the suspended directors or any of the officers of the company, no action should be initiated against the newly appointed directors, without prior approval of the Tribunal.

Uday Kotak (Chairman) and Vineet Nayyar (Vice Chairman) were appointed when they reconstituted a 8 member Board of Directors.

Grant of moratorium (NCLAT order)

Further, in order to ensure a period of calm during the resolution process, a moratorium was sought qua IL&FS and its group companies against certain creditor actions. The reason for seeking this moratorium was the impending threat of adverse legal actions by creditors and the absence of a legal framework to address the financial crisis of the IL&FS Group.

The new Board would require the status quo to be preserved in respect of the business and assets of the IL&FS Group in order to effectively implement the orders of the NCLT and arrive at a fair resolution for the company. This was declined by the NCLT by its order dated October 12, 2018. 

However, upon appeal, the National Company Law Appellate Tribunal (NCLAT) granted a moratorium on an interim basis until further orders. The matter is sub-judice.

SFIO interim report and NCLT order

The Serious Fraud Investigation Office (SFIO) submitted an interim report dated November 30, 2018. On the basis of this interim report, the Central Government vide its affidavit dated December 3, 2018, sought the impleadment of more persons as respondents in the original petition.

NCLT vide its order dated December 3, 2018., granted relief to the Central Government who filed an application for seeking orders, qua the additional respondents, to restrain them from mortgaging or creating charge or lien or creating third party interest or in any way alienating, the movable or immovable properties owned by them, including jointly held properties. The same is still in operation, and as on date, there are a total of 318 respondents in the petition before the NCLT.

Role of ICAI

In view of the negative impact that the IL&FS Group has had on the financial markets at large, and there being considerable allegations in respect of the financial statements of the said companies, the Disciplinary Directorate of the Institute of Chartered Accountants of India (ICAI) suo motu sought to consider the performance of the statutory auditors of the said companies. 

Pursuant to an enquiry conducted in respect of the statutory auditors of the IL&FS Group Companies, the ICAI found that there were key lapses, shortcomings, and manipulations on the financial statements by the statutory auditors of the said companies. 

It was noted that the condition of the said companies as a result of mismanagement reflects upon the statutory auditors of the said companies. The ICAI has held the statutory auditors of the said companies prima facie guilty of professional misconduct.

Meanwhile, a spur between ICAI and National Financial Reporting Authority (NFRA) - a recently formed regulator under Ministry of Corporate Affairs - has raised questions as to who is going to look into the role of the auditing firms. As per sources, NFRA has initiated a probe into the matter. 

Tribunal ordered reopening of Books of Account (NCLT order)

In view of the prima facie findings of ICAI and the SFIO interim report dated November 30, 2018, the Central Government filed a petition before the NCLT, Mumbai Bench under Section 130 of the Companies Act, seeking re-opening of the books of account of IL&FS and its group companies for the past five financial years.

The NCLT vide its judgment dated January 1, 2019, allowed the petition of the Central Government

Classification of IL&FS Group Companies on the basis of Solvency:


Upon an application filed by PTC India Financial Services Ltd, the
NCLAT has, without going into the rival contention of the parties, made it clear that due to non-payment of dues by IL&FS or its entities including the ‘Amber Companies’, no financial institution will declare the accounts of IL&FS or its entities as Non Performing Assets (NPA) without its prior permission.

NCLAT order dated May 2, 2019

By its order dated May 2, 2019,  NCLAT allowed the banks to declare as non-performing assets the accounts of IL&FS and its group companies that have defaulted on payments. However, the tribunal clarified that the banks cannot initiate the recovery process and debit money. 

SFIO Report and MCA move against Auditors

On May 30, SFIO submitted a chargesheet against 30 parties, including two auditor firms, for concealing information by not flagging the alleged criminal conspiracy and misreporting the financial statements of the IL&FS firms.

MCA moved against the auditors, Deloitte Haskins and Sells as well as BSR and Associates LLP and their former auditors, under Section 140(5) of the Companies Act, for their role in “perpetuating the fraud” at IFIN, a subsidiary of IL&FS. The Ministry sought debarment of these audit firms and their audit partners. It also sought interim attachment of their properties, including bank accounts and lockers. 

Supreme Court interim order

On June 4, the Supreme Court allowed the SFIO to reopen and recast accounts of IL&FS and two of its subsidiary companies for the last five years.

The MCA had approached the Supreme Court seeking a vacation of the stay imposed by the Supreme Court through its order passed on April 29. 

Status of Debt-Ridden Entities of IL&FS Group 

NCLAT vide order dated July 12, 2019, asked the IL&FS and MCA whether any red entity can be categorized into “green entity” or “amber entity”. No specific statement was made in regard to the one or more red entities. The Hon’ble court granted a two weeks time to IL&FS and Union to file an affidavit stating the action they intend to take with regard to 55 loss-making red entities. IL&FS and Union will also inform the steps required to be taken for the other Red Entities.

NCLAT directed IL&FS and Union to state in their affidavit the proposed steps they will take to release the amounts payable towards “Pension Fund, Provident Fund, Army Group Insurance Fund, Gratuity Fund, Superannuation Fund, Postal Life Insurance Fund, etc, if invested in one or other Red Entity.

IL&FS informed that three amber listed companies- Jharkhand Road Projects Implementation Company, West Gujarat Expressway, and Moradabad Bareilly Expressway, would be upgraded to Green entities. The matter is listed for hearing on August 8, 2019.

Proceeding against Auditors

Ministry of Corporate Affairs proceeded to start a prosecution against the auditors of IL&FS based on the Serious Fraud Investigation Report ((SFIO). Thereby Deloitte and BSR Associates are prosecuted for their failure to detect and report the scams that took place involving IL&FS and its 21 entities when they were the auditors of the IL&FS. The NCLT vide its order dated July 18, 2019 accepted and allowed the request of MCA. The Auditors Deloitte and BSR are currently arguing before NCLT that "the NCLT can't pass final order to ban auditors under Section 140(5) of IBC on prima facie evidence of fraud and an auditor, which has already resigned can't be double punished". The arguments of the Auditors are being heard on Monday (July 22, 2019).

NCLT also allowed the prosecution of C Sivasankaran and his group based on the SFIO report. The report revealed that the management of IFIN has missed their position to give loans to Shiv Group ignoring the fact that many companies failed to repay the loans given by the IFIN. Tribunal also allowed the MCA to implead Surinder Singh Kohli and Subhalakshmi Panse who were the independent director of IFIN and member of Audit Committee who were aware of the NPAs of the company and knew that loans were granted to the already defaulting borrowers.

The auditors argued that NCT didn’t have a jurisdiction to decide the government demand for a five-year ban against the auditors of IL&FS.

Law Firms Involved at Various Stages

  • Argus Partners
  • AZB & Partners
  • Cyril Amarchand Mangaldas
  • DSK Legal
  • K. Ashar & Co.
  • Khaitan & Co
  • L&L Partners

About the author: The author is a fourth year student of the Dr. Ram Manohar Lohiya National Law University, Lucknow. He recently interned at the Ministry of Corporate Affairs, during which time he was able to observe the IL&FS case.