The Insolvency and Bankruptcy Board of India (IBBI) has flagged the misuse of the Insolvency and Bankruptcy Code (IBC) for purposes beyond insolvency resolution or liquidation.
In a circular issued on September 9, the regulator asked Insolvency Professionals (IPs) to remain vigilant for signs that the insolvency process could be serving fraudulent or malicious purposes.
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IBBI said it had received information from law enforcement and regulatory agencies about such cases. The alleged misuse includes mitigating tax liabilities and enabling the closure or merger of companies without regulatory scrutiny.
It also includes mitigating investigations, prosecutions and penalties under various laws. Monetising or ring-fencing assets could also indicate potential misuse, the regulator said.
IBBI Lists Key Warning Signs
IBBI flagged cases where the Corporate Insolvency Resolution Process (CIRP) is initiated by a single creditor, or where debt is assigned to a single creditor shortly before initiation, and that creditor subsequently dominates the Committee of Creditors.
The regulator also highlighted clusters of connected companies entering CIRP within a similar timeframe. Common promoters, directors or addresses, as well as inter-lending, could indicate such connections.
Limited competitive participation in the resolution process is another warning sign. IBBI also flagged recurring resolution applicants across connected companies.
The regulator said realisation to creditors that is grossly disproportionate to admitted claims, without support from a proper valuation exercise, warrants scrutiny. Links to fraud-related orders or ongoing proceedings involving another regulator, enforcement agency or investigating agency were also flagged.
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Substantial loans, advances or investments involving related or group entities were also listed as a warning sign, particularly where there is no evidence of operations or where such amounts have been written off or classified as doubtful or nil without an adequate basis.
IBBI clarified that these indicators are not conclusive proof of wrongdoing. Some may arise in cases involving genuine financial distress or in the ordinary course of commercial operations.
Insolvency Professionals (IPs) Must Approach Adjudicating Authority In Certain Cases
IPs must undertake further enquiries when one or more indicators, or other similar circumstances, emerge. They should assess the situation based on records and information available during the CIRP or liquidation process.
If, following such a review, an IP forms a view on reasonable grounds that the process may be serving a fraudulent or malicious purpose, the IP must approach the Adjudicating Authority with the relevant facts and supporting material.
The application must identify the warning signs noticed, the material relied upon and the reasons for forming such a view.
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