Regulator IBBI on Wednesday asked insolvency professionals to do due diligence to prevent misuse of the insolvency resolution framework to mitigate tax liabilities and close companies without regulatory scrutiny.
IBBI is a key institution in implementing the Insolvency and Bankruptcy Code (IBC) that provides for timely and market-linked resolution of stressed assets.
In a two-page circular, the Insolvency and Bankruptcy Board of India (IBBI) said it has received information from law enforcement and regulatory agencies that, in certain cases, the IBC framework is being misused for purposes other than insolvency resolution or liquidation of the corporate debtor.
“Such instances include, inter alia, mitigating tax liabilities, closure/merger of companies without regulatory scrutiny, mitigating investigations, prosecution and penalties under various statutes, monetising and ring-fencing assets etc,” the circular said.
Insolvency Professionals (IPs) should remain vigilant to circumstances that may indicate misuse of the insolvency process, IBBI said and cited possible indicators of misuse of the IBC framework.
A cluster of corporate debtors with common promoters, addresses, directors, or inter-lending, taken into CIRP within a proximate timeframe with overlapping CoC composition and minimal competitive participation in the resolution process, or a common resolution applicant recurring across connected corporate debtors could be possible indicators.
CIRP is Corporate Insolvency Resolution Process, and CoC is Committee of Creditors.
“On noticing one or more such indicators, or other circumstances of a similar nature, the Insolvency Professional (IP) should undertake such further enquiry as may be warranted, based on the records and information available in the ordinary course of the CIRP or liquidation process,” IBBI said.
In case the IP is of the view that the process may be serving a fraudulent or malicious purpose, IBBI said, the IP should make an application before the Adjudicating Authority (AA), and seek directions under the IBC.
The circular comes against the backdrop of a five-member special bench of the National Company Law Tribunal (NCLT), on September 1, barring Essel Group chairman Subhash Chandra from alienating his properties and issuing notices to all parties in a case over a proposed settlement that would allow creditors to recover just about Rs 6.5 crore from his personal estate against claims of roughly Rs 22,006 crore.
The case is now also before the National Company Law Appellate Tribunal (NCLAT), after dissenting lenders challenged the repayment plan.
The dispute centres around a repayment plan under which Chandra was allowed to settle claims arising from personal guarantees on his group’s borrowings for just Rs 6.5 crore – a 99.9 per cent haircut on the Rs 22,006 crore his companies have defaulted on.
Chandra has argued that the widely cited Rs 22,006-crore figure does not represent the money he personally borrowed. Instead, he says it comprises claims arising from guarantees he gave for loans raised by Essel Group companies.
He has put the personal guarantee claims at about Rs 3,990 crore, saying the larger figure relates to claims against the underlying corporate borrowers.
