Insolvency and Bankruptcy Board of India (IBBI) Chairperson Ravi Mittal has urged the Committee of Creditors (CoC) to take the avoidance transactions under the Insolvency and Bankruptcy Code (IBC) “seriously”, and review the progress of these proceedings on a monthly basis to enhance recoveries.
“The CoC should review the progress of these avoidance proceedings on a monthly basis and if required, create a mechanism to pursue these transactions before the Adjudicating Authority (AA),” Mittal said in the recent quarterly newsletter of the IBBI.
He said that recovery from avoidance transactions would play a “vital role in reducing haircuts to creditors”. On a conservative scale, decisions on avoidance transactions would add recovery to creditors by at least 10%, he added.
Under the Code, avoidance transactions are addressed under provisions of Chapter III. Broadly, they encompass transactions made by the corporate debtor (CD), before the commencement of the Corporate Insolvency Resolution Process (CIRP), to unduly benefit specific creditors, avoid payments to others, or to deplete the CD’s assets.
However, the IBC allows resolution professionals (RP) to undo/reverse such transactions, by an order from the AA–the National Company Law Tribunal (NCLT), if they meet specific conditions. The IBC outlines four types of avoidance transactions–namely preferential, undervalued, fraudulent, and extortionate transactions (PUFE).
Moreover, Mittal said that specifically in those cases where avoidance transactions are approved by the AA for prosecution, creditors should approach the Ministry of Corporate Affairs (MCA) or the IBBI and file a criminal complaint under section 236 of the IBC before the Special Court.
According to Mittal, a “significant value” of insolvent entities is often locked in assets underlying avoidance transactions which are undertaken by the CD prior to the initiation of the Corporate Insolvency Resolution Process (CIRP). “The resolution professional or the liquidator is obliged to file applications, in respect of avoidance transactions found by him during CIRP and liquidation processes before AA, seeking appropriate relief permissible under the Code,” he said.
According to official data, as of end of September 2024, as many as 1,326 avoidance transaction applications involving an amount of Rs 3.76 lakh crore have been filed with the AA. The AA, after consideration, can order for the amount to be clawed back, said Mittal.
Since inception, the IBC has led to a direct recovery of about Rs 3.55 lakh crore due to resolution and Rs 10,446 crore due to liquidation till September, 2024. The recovery from avoidance transactions will add to this recovery to the creditors. Till September 2024, 338 avoidance transaction applications have been settled by the AA ordering a claw back of about Rs 7,516 crore, noted Mittal.
Experts say the views expressed by the Chairperson of IBBI are in line with the intent of the Code. “Mechanisms should be established by the CoC to ensure that avoidance transactions are regularly reviewed and thoroughly pursued as they are in aid of preserving the assets of the CD,” said Piyush Agrawal, partner, AQUILAW.
Sukrit Kapoor, partner, King Stubb & Kasiva, said: “I certainly agree with the views of the Chairperson, particularly on the need for initiating prosecution against the errant promoters.” Also, pursuing the amount involved in avoidance transactions can even attract litigation funding to the larger Indian legal landscape through the insolvency route, he added.
