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August 21, 2020

ED raids Bhushan Power Resolution Professional for illegally removing goods worth Rs 700 crore

by facelesscompliance in Compliance Law, Corporate Law

ED raids Bhushan Power Resolution Professional for illegally removing goods worth Rs 700 crore

The Enforcement Directorate (ED) raided the Resolution Professional (RP) Mahender Kumar Khandelwal in the matter of Bhushan Power and Steel Ltd (BPSL), for allegedly helping the former promoters of the company secretly clear finished goods for which he was paid in cash, according to a statement issued by the agency on August 20, 2020.

Directorate of Enforcement is a specialized financial investigation agency under the Department of Revenue, Ministry of Finance, Government of India, which enforces the following laws: – 

  • Foreign Exchange Management Act,1999 (FEMA) – A Civil Law, with officers empowered to conduct investigations into suspected contraventions of the Foreign Exchange Laws and Regulations, adjudicate, contraventions, and impose penalties on those adjudged to have contravened the law. 
  • Prevention of Money Laundering Act, 2002 (PMLA) – A Criminal Law, with the officers empowered to conduct investigations to trace assets derived out of the proceeds of crime, to provisionally attach/ confiscate the same, and to arrest and prosecute the offenders found to be involved in Money Laundering.

Insolvency Proceedings against Bhushan Power and Steel Ltd (BPSL)

  • Bhushan Power was part of the original dirty dozen cases identified by the Reserve Bank of India to be referred to bankruptcy courts.
  • In 2017, lender Punjab National Bank (PNB) had launched insolvency proceedings against BPSL under the Insolvency and Bankruptcy Code (IBC) 2016.
  • PNB officials had reported Rs 3,800 crore frauds and disclosed that 85% of its exposure to BSPL had been siphoned off.
  • The bank had also claimed that Bhushan Power had misappropriated bank funds and manipulated their account books.
  • On July 26, 2017, the NCLT had admitted the insolvency petition and the debt-ridden firm’s resolution process were formally started.

ED raided the Resolution Professional in the matter of Bhushan Power and Steel Ltd (BPSL)

  • Raids were conducted at the offices and residence of Mahender Kumar Khandelwal the Resolution Professional (RP) in Delhi and Gurugram apart from the residence of BPSL’s former director.
  • Incriminating documents, laptops, mobile phones, extracts and other valuables such as jewellery worth Rs 86 lakh were seized.
  • Incriminating documents indicating receipt of cash by M K Khandelwal while discharging duties of Resolution Professional/Interim Resolution Professional were also seized.
  • The former promoters of BPSL are under investigation for diverting Rs 4,025 crore bank funds taken as loans.

Contention of ED in the Bhushan Power and Steel Ltd (BPSL) case

  • According to the ED, BPSL secretly cleared finished goods worth Rs 700 crore without payment of applicable taxes and duties and without issuance of any statutory invoice from its Odisha Plant to its plants at Kolkata and Chandigarh.
  • Goods valued at Rs 700 crore had been cleared without payment of applicable taxes and duties and without issuance of any statutory invoice.
  • This practice which was resorted to by the management of the company had continued even after initiation of CIRP (Corporate Insolvency Resolution Process) and some irregularities on part of Resolution Professional M K Khandelwal were also revealed.
  • Huge cash payments to various individuals outside the books of accounts indicated siphoning and generation of cash from various concerns undergoing process of CIRP under NCLT (National Company Law Tribunal).

This move could delay the plans of JSW Steel to acquire scam riddled BPSL. 

  • This development came at a time when the plea of JSW Steel seeking immunity from any ED action on erstwhile promoters of the BPSL was set to be decided by the Supreme Court in September. JSW Steel’s offer for the bankrupt steel mill, was the highest bidder for the asset. 
  • JSW’s bid worth Rs 19,700 crore for BPSL’s plant was approved by the National Company Law Appellate Tribunal (NLCAT) in February 2020 and the agency was asked to release the assets of BPSL. ED was against the order of the NLCAT.
  • An amendment of the Insolvency and Bankruptcy Code in December 2019 discharged new owners from prior liability of offences committed by a corporate debtor. 
  • The ED said the NLCAT had “erred in law” in applying the IBC clause retrospectively in the case, which was registered before the amendment was introduced on December 28, 2019. 
  • The ED also said the NLCAT did not have the jurisdiction to direct the agency to release property attached under the Prevention of Money Laundering Act (PMLA). 

Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism for creditors. If a corporate becomes insolvent, a financial creditor, an operational creditor, or the corporate itself may initiate CIRP.

Excessively high fees, huge expenses and now serious allegations of embezzlement can destroy the entire concept of beneficial public interest and quick insolvency which was the initial agenda of the Corporate Insolvency Resolution Process (CIRP).

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