The Insolvency and Bankruptcy Board of India (IBBI) has warned insolvency professionals against the misuse of the Insolvency and Bankruptcy Code, 2016, for purposes including reducing tax liabilities, avoiding regulatory scrutiny and obstructing investigations.
The regulator has directed professionals to closely examine suspicious insolvency proceedings and act when there are reasonable grounds to suspect fraudulent or malicious intent.
IBBI Flags Misuse Beyond Genuine Insolvency
In a circular, the IBBI said it had received information from law enforcement and regulatory agencies indicating that, in some cases, the insolvency framework was being used for purposes other than resolving insolvency or liquidating a corporate debtor.
According to the circular, such instances may include mitigating tax liabilities, closing or merging companies without regulatory scrutiny, mitigating investigations, prosecution and penalties under various statutes, and monetising or ring-fencing assets.
The regulator said insolvency professionals have direct access to a corporate debtor’s books, financial records and proceedings of the committee of creditors. This places them in a central position to identify irregularities and flag questionable conduct at an early stage.
Regulator Lists Red Flags for Professionals
The circular identified several patterns that could warrant closer examination. These include corporate insolvency resolution processes initiated by a single non-institutional creditor who later dominates the creditor panel, as well as clusters of interconnected corporate entities entering insolvency simultaneously.
Other indicators include minimal competitive bidding accompanied by recurring resolution applicants, realisations to creditors that are grossly disproportionate to admitted claims without proper valuation, and active fraud proceedings against the corporate group by other regulatory or enforcement agencies.
The IBBI also flagged substantial inter-company loans or investments being written off without sufficient basis.
However, the regulator stressed that these indicators are illustrative rather than exhaustive. Some may also arise from genuine financial distress or during the ordinary course of commercial operations and should not, on their own, be treated as conclusive evidence that the insolvency process is being misused.
Insolvency professionals have therefore been asked to conduct further enquiries based on records available during resolution or liquidation whenever suspicious circumstances emerge. The indicators assume greater significance when a broader review of the circumstances points towards fraudulent intent.
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Suspected Fraud Must Be Taken to Adjudicating Authority
The IBBI said that where an insolvency professional, after reviewing the circumstances, forms a view on reasonable grounds that the process may be serving a fraudulent or malicious purpose other than insolvency resolution or liquidation, the matter must be taken before the Adjudicating Authority.
The application should set out the relevant facts and materials and seek appropriate directions under the Insolvency and Bankruptcy Code. It must specify the indicators noticed, the material examined and the reasons supporting the professional’s conclusion that there are reasonable grounds to suspect misuse.
The circular has been issued under Section 196 of the Insolvency and Bankruptcy Code.
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