New Delhi — The Insolvency & Bankruptcy Board of India (IBBI) has floated a discussion paper to prevent misuse of the insolvency law to settle debt, avoid liability, or consolidate companies without regulatory scrutiny, according to a draft circular circulated for comments on Friday.
The paper said the board has received information from law-enforcement and other regulatory agencies indicating that the corporate insolvency resolution process (CIRP) framework is, in certain cases, being resorted to with malafide intent. The discussion paper listed the following as the basis for concern:
The board has received information from law-enforcement and other regulatory agencies, indicating that CIRP framework is, in certain cases, being resorted to with malafide intent — to settle debts outside the ordinary process of recovery, mitigate tax and other statutory liabilities, close or merge companies without regulatory scrutiny, mitigate the effect of pending or anticipated investigations, prosecution and penalties under other statutes, and to monetise or ring-fence assets.
Nine red flags in the draft circular
The draft circular, accompanying the discussion paper, highlights at least nine markers that insolvency professionals should watch for and report to the National Company Law Tribunal (NCLT).
| # | Red flag identified by IBBI |
|---|---|
| 1 | Companies with no or negligible operations, revenue, or assets, and a history of negative net worth |
| 2 | Substantial loans or investments from related or group entities, despite absence of operations, which have been written off |
| 3 | Qualified audit opinions or emphasis on recoverability of loans |
| 4 | Insolvency action initiated by a single large creditor, dominating the committee of creditors |
| 5 | Valuers or auditors unable to verify asset classes due to absence of documents |
| 6 | Erstwhile management unwilling to co-operate |
| 7 | Minimal participation or a common resolution applicant across connected entities |
| 8 | Realisation of creditors grossly disproportionate to admitted claims |
| 9 | Valuation exercise unsupported |
Escalation to the NCLT
The discussion paper proposes that, after thorough examination by the insolvency professional, cases of suspected fraud or those with malicious intent should be filed before the NCLT. Insolvency professionals are expected to stay alert and inform the tribunal when they come across instances of wrongful use of the law.
Implications for borrowers and creditors
For corporate borrowers, the draft circular signals tighter scrutiny at the admission stage. It flags companies with no or negligible operations, revenue, or assets and a history of negative net worth, as well as those with substantial loans or investments from related or group entities that have been written off despite the absence of operations. Qualified audit opinions or an emphasis on loan recoverability are also listed as triggers for concern, along with insolvency actions initiated by a single large creditor who dominates the committee of creditors.
For creditors, the markers around minimal participation in the resolution process, a common resolution applicant across connected entities, and realisation that is grossly disproportionate to admitted claims indicate potential distortions in outcomes. The paper also draws attention to cases where valuers or auditors are unable to verify asset classes due to missing documents, where the erstwhile management is unwilling to cooperate, and where the valuation exercise is unsupported.
The paper highlights that insolvency professionals have a duty to escalate such cases after examination, reinforcing the need for robust due diligence in every CIRP. The draft circular was circulated for comments on Friday, according to the discussion paper.
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