IBBI Tightens Insolvency Rules to Prevent Misuse
By Business Desk
IBBI proposes stricter oversight for insolvency professionals to combat fraudulent use of CIRP for debt settlement, tax evasion, and asset protection.
The Insolvency and Bankruptcy Board of India (IBBI) has proposed enhanced scrutiny by insolvency professionals (IPs) to tackle the misuse of the corporate insolvency resolution process (CIRP). This move follows reports from various bodies highlighting the exploitation of the insolvency framework for non-genuine resolution purposes.
Unpacking the Misuse Concerns
Law enforcement and regulatory bodies have indicated that the insolvency framework is being exploited for various fraudulent purposes. The IBBI specifically noted instances where the process was used for reasons other than its intended genuine resolution.
- Debt settlement
- Tax liability mitigation
- Company closures or mergers without proper scrutiny
- Avoiding investigations or penalties
- Monetizing or protecting assets
IPs’ Mandate for Enhanced Scrutiny
The draft circular underscores that IPs, owing to their access to company records and Committee of Creditors (CoC) proceedings, are responsible for identifying signs of misuse. They must report these red flags to the adjudicating authority.
- Companies with minimal operations, revenue, or tangible assets
- Consistently negative net worth
- Significant loans or investments involving related or group entities
- Qualified audit reports
- Weak controls over related-party transactions
- Links to regulatory or enforcement actions concerning fund diversion or fraudulent use
Identifying Deeper Indicators
Another area of concern is the concentration of lenders, particularly around the initiation of CIRP, where debt transfers to a single creditor who then dominates the CoC. The IBBI also highlighted additional common indicators of potential abuse.
- Multiple connected companies entering CIRP simultaneously
- Shared promoters or directors
- Overlapping CoCs
- Difficulties in asset verification
- Limited competition among bidders
IPs are expected to thoroughly review these indicators and form a reasoned opinion. If an IP determines that the insolvency process was initiated fraudulently or with malicious intent, they must file an application with the adjudicating authority under Section 60(5) read with Section 65 of the IBC for appropriate directions and penalties.
The IBBI clarified that this draft is purely explanatory, aiming to clarify existing duties rather than imposing new obligations on IPs. Stakeholders have until **August 24** to submit their comments on the proposed guidance.