NEW DELHI: The Insolvency & Bankruptcy Board of India (IBBI) has floated a paper to prevent misuse of insolvency law to settle debt or avoid liability or consolidate companies without regulatory scrutiny. It has highlighted red flags that insolvency professionals should stay alert and inform the National Company Law Tribunal (NCLT) in case it comes across instances of wrongful use of the law.“The board has received information from law-enforcement and other regulatory agencies, indicating that CIRP (corporate insolvency resolution process) 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,” the discussion paper circulated for comments on Friday said.At least nine markers have been highlighted by IBBI in the draft circular, along with the discussion paper, including the reference of companies with no or negligible operations, revenue or assets, which have had a history of negative net worth. Similarly, instances of companies that have substantial loans or investments from related or group entities, despite absence of operations, which have been written off, should raise an alarm, it added.
Further, companies that have qualified audit opinions or there is emphasis on recoverability of these loans need to be watched out for or even those where insolvency action has been initiated by a single large creditor, dominating the committee of creditors, which manages the process during CIRP.In cases, where valuers or auditors are unable to verify the asset classes due to absence of documents or where the erstwhile management is unwilling to co-operate, need to be watched.The draft circular has also said that companies where there is minimal participation or a common resolution applicant figures across connected entities should raise alerts as also cases where realisation of creditors is grossly disproportionate to the admitted claims and where the valuation exercise is unsupported.After thorough examination by the insolvency professional, IBBI has proposed that cases of suspected fraud or those where there is malicious intent should be filed before NCLT.