From NSEL to Unitech: Govt uses Companies Act to defend ‘public interest’


New Delhi, Dec 8: The government on Friday invoked the same provisions as it did for Satyam to take over the management control of real estate company Unitech. Though the case has been moved in the National Company Law Tribunal, which has acquired the moniker bankruptcy court, these are tougher charges—those of fraud, under section 447 of the Companies Act. If convicted the punishment can range up to ten years in prison.
Under the Companies Act, the government can move the tribunal if it thinks that affairs of a company are being conducted in a manner prejudicial to the public interest.
Bankruptcy charges, by comparison, do not carry the risk of imprisonments, per se. Unitech, according to BloombergQuint report, has been accused of mismanagement and diversion of funds. The move by the corporate affairs ministry is “daring”, said a government official involved in the bankruptcy litigation.
It also demonstrates the distance India has covered in terms of ability to handle such cases since the Satyam scandal broke out in 2009. The IT company’s case had forced the government to rewrite the old Companies Act, 1956 which did not have a clear clause for fraud back then. Those had to be imported into the new act. And it is under these new powers that the ministry has asked to replace the board of directors at Unitech, a company that was once India’s second-largest real estate major by market cap.
In the past fortnight, the government has made another high-profile intervention in the corporate sector with the merger of NSEL with its parent company, FTIL. In both cases, the powers vested with it by the new Companies Act has proved to be useful in defending the public interest. While the Act wrote in these provisions, it was debated whether the government would drum up the confidence to invoke the clauses.
Of course, it is for the NCLT to decide whether the government’s plea has merits, but from here, it is quite evident that there will be a reference to the tribunal again over bankruptcy provisions. With the board having been replaced by then, the insolvency professionals will be dealing with the government as an interested entity, defending the public interest. How the government manages to navigate between the interests of creditors, flat owners and the attendant risk of corruption in handling real estate properties worth few hundred crores will be an intriguing episode.