The Insolvency & Bankruptcy Board of India (IBBI) has released a discussion paper to prevent misuse of insolvency law for improper purposes. According to reports from IBBI, the board has highlighted nine red flags that insolvency professionals should monitor and report to the National Company Law Tribunal (NCLT) when encountered during corporate insolvency resolution processes. The proposed guidance has been issued after receiving inputs from law-enforcement and regulatory agencies about cases where the insolvency framework might have been used for purposes unrelated to resolution.
The discussion paper reveals that corporate insolvency resolution process (CIRP) framework is being misused with malafide intent in certain cases. As reported by IBBI, companies are resorting to insolvency proceedings to settle debts outside ordinary recovery processes, mitigate tax and statutory liabilities, close or merge companies without regulatory scrutiny, and monetise or ring-fence assets. The board has also flagged cases where CIRP is being used to settle debts, mitigate tax liabilities, close or merge companies without regulatory scrutiny, mitigate investigations, prosecution and penalties. The proposed guidance specifically addresses these improper uses of the legal framework.
According to the draft circular, nine specific markers have been identified by IBBI as warning signs for potential misuse. These include companies with negligible operations, revenue or tangible assets and persistently negative net worth as well as substantial loans, advances or investments involving related or group entities. The board has also flagged cases where lender concentration around the initiation of CIRP is a concern, identifying cases where debt is assigned shortly before insolvency proceedings to a single creditor that subsequently dominates the committee of creditors (CoC). Additionally, IBBI has highlighted common signs of misuse, including groups of connected companies entering CIRP around the same time, common promoters or directors, overlapping CoCs, difficulties in verifying assets, and limited competition among bidders.
After thorough examination by insolvency professionals, IBBI has proposed that cases of suspected fraud or those with malicious intent should be filed before NCLT. The board emphasizes that insolvency professionals must stay alert and inform the tribunal when encountering instances of wrongful use of insolvency law, ensuring proper regulatory oversight of the resolution process. The proposed guidance specifically states that IPs, due to their access to the books, records and committee of creditors (CoC) proceedings, have a duty to identify signs of misuse and bring them to the adjudicating authority's notice. The regulator has further clarified that where the IP is of the opinion that the insolvency process was initiated fraudulently or with malicious intent for a purpose other than resolution or liquidation, the IP shall file an application before the adjudicating authority under Section 60(5) read with Section 65 of the IBC for suitable directions and penalty, in addition to any application warranted under Sections 43, 45, 50 or 66.
The proposed circular is intended to clarify existing duties and ensure consistency in identifying potential abuse. The regulator has invited comments from stakeholders by August 24. As per IBBI, the draft is explanatory in nature and does not create any new obligations for insolvency professionals. The guidance emphasizes that insolvency professionals should review such indicators in detail and form a considered opinion before taking appropriate action to prevent fraudulent misuse of the insolvency resolution process.
