Resolution professionals have now been tasked with additional responsibility under the Insolvency and Bankruptcy Code. The Insolvency and Bankruptcy Board of India amended its regulations on Wednesday to strengthen the due diligence on resolution applicants.
While the IBBI’s media statement mentions that the changes are also intended to test the “credit worthiness” of resolution applicants, the text of the amendments do not lay down any test related to this.
That notwithstanding the amendments have addressed two concerns under the insolvency process, Anshul Jain, a corporate law partner at Luthra & Luthra explained.
The first relates to the confusion lenders had on whether they should simply pick a plan that gives them best value or do they have a fiduciary duty to assess the credibility of resolution applicants.
The second relates to the possibility of promoters submitting resolution plans through front-end entities, for instance, special purpose vehicles or asset reconstruction companies or non-banking financial companies.
The amendments address both these issues. Resolution professionals will have to include details not just on the resolution applicants but connected persons as well. Interestingly, details on potential promoter in the implementation phase of the resolution plan also needs to be included.Anshul Jain, Partner, Luthra & Luthra
Additionally, resolution professionals will also need to include in the plans information on preferential, undervalued , extortionate credit and fraudulent transactions, if any, done by the company in the last 2-3 years.
So far, it was not mandatory for the resolution professional to report all such transactions when presenting the plans. Now it will be, says Jain.
Most resolution professionals weren’t doing any due diligence on such transactions. In the last 10 days, the IBBI has sent several show-cause notices to resolution professionals, especially those handling the big 12 accounts classified by the Reserve Bank of India. The regulator was asking resolution professionals to report to it any such transactions that they may have noticed. There were some who then questioned the regulator’s powers since the law didn’t cast any such responsibility on the resolution professionals.Anshul Jain, Partner, Luthra & Luthra
With this amendment, the resolution professional will now have to actively investigate the existence of any such transactions, Jain added.
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