The Insolvency and Bankruptcy Board of India (IBBI) has made it mandatory for the resolution professionals (RPs) to formally inform the committee of creditors (CoC) about any fraudulent or avoidance transactions carried out by a company prior to its bankruptcy. The amendments are aimed at improving the transparency, and the treatment of “avoidance transactions” in the corporate insolvency resolution process (CIRP), IBBI circular said.
Under the amended rules, the RP will have to include the details of the “identified avoidance transactions or fraudulent or wrong trading” in the information memorandum, which is essentially a comprehensive document giving details about the corporate debtor undergoing CIRP.
Till recently, the RPs were filing the details of such transactions with just National Company Law Tribunal (NCLT), and there was no mechanism to inform the CoC.
Avoidance transactions are those unduly favouring certain creditors or the ones that could undermine the insolvency process. Preferential, undervalued, fraudulent, and deals of extortionate nature come under the ambit of these.
“Even though CoC were aware of such transactions unofficially, these rules now require RPs to keep the information memorandum updated, and provide the same to CoC periodically,” a senior insolvency expert said.
Further, the circular said that the resolution plan will have to upfront inform the resolution applicants on how such avoidance or fraudulent transactions will be dealt with by the CoC.
Experts said the tweaks in the rules will help CoC to broadly ascertain the value lost through these transactions, and the amount of value that can be brought back to the company.
“After the RP files details of avoidance transactions with NCLT, it usually takes 3-5 years for NCLT to dispose of avoidance applications. With these amendments, the CoC and resolution applicants would know in advance how much value is locked in such transactions, and the possibility of recovery. They would accordingly assign the correct valuation to the company. Hence, there’s going to be better price discovery and maximisation of value for the assets,” said a corporate lawyer.
To be sure, the avoidance transactions are primarily of four types: preferential, undervalued, fraudulent and extortionate credit transactions.