The Insolvency and Bankruptcy Board of India (IBBI) has directed insolvency professionals to remain alert to potential misuse of the Insolvency and Bankruptcy Code, 2016 (IBC) for objectives unrelated to genuine insolvency resolution or liquidation.
The regulator stated that inputs received from law-enforcement and regulatory authorities indicate instances where the insolvency framework may be used to reduce tax liabilities, avoid regulatory scrutiny, hinder investigations or prosecutions, and protect or monetise corporate assets.
IBBI has highlighted the role of insolvency professionals in identifying such concerns because they have access to the corporate debtor's books, financial information and proceedings of the committee of creditors. Professionals have therefore been advised to undertake appropriate scrutiny whenever circumstances indicate possible manipulation of the insolvency process.
The regulator has identified several circumstances that may warrant closer examination. These include insolvency proceedings initiated by a single non-institutional creditor who later exercises significant influence over the creditors' committee, multiple interconnected companies entering insolvency around the same period, limited competition among resolution applicants, and repeated participation by the same applicants.
Other indicators include creditor recoveries that appear significantly higher than admitted claims without adequate valuation support, ongoing fraud-related proceedings involving the corporate group, and substantial inter-company loans or investments being written off without adequate justification.
IBBI clarified that these indicators are illustrative rather than conclusive. A particular indicator may also occur in legitimate insolvency proceedings or normal commercial activity and should not, by itself, be treated as evidence of misuse.
Where suspicious circumstances are identified, insolvency professionals are required to undertake further examination based on records and information available during the resolution or liquidation process. The regulator has emphasised that the indicators become more significant when the overall circumstances suggest a possible fraudulent or malicious purpose.
If, after such examination, an insolvency professional has reasonable grounds to believe that the insolvency process is being used for a purpose other than resolution of insolvency or liquidation, the professional is required to approach the Adjudicating Authority with the relevant facts, supporting material and reasons for seeking appropriate directions under the IBC.
The application should clearly set out the indicators identified, the information and records examined, and the basis on which the insolvency professional formed reasonable grounds regarding possible misuse of the insolvency framework. CASansaar