IBBI Moves To Curb Misuse Of CIRP, Flags Nine Suspicious Indicators

New Delhi, Aug 25 (KNN) The Insolvency and Bankruptcy Board of India (IBBI) has asked insolvency professionals to remain vigilant for at least nine indicators of potential misuse of the Corporate Insolvency Resolution Process (CIRP), following inputs from law-enforcement and regulatory agencies that the framework may be invoked with malicious intent in some cases.

The regulator has proposed that resolution professionals (RPs) investigate suspicious patterns, form an opinion and, where necessary, approach the National Company Law Tribunal (NCLT) for appropriate directions and penalties. Stakeholders were invited to submit comments on the draft circular by August 24.

Key Red Flags

The indicators include CIRP involving companies with no or negligible operations, revenue or tangible assets and persistently negative net worth. Greater scrutiny is also proposed where such companies have substantial loans or investments involving related parties despite having little or no business activity.

Other indicators include weak internal controls over related-party transactions, CIRP initiated by a single creditor that subsequently dominates the committee of creditors, inability of valuers or auditors to verify asset classes, and the presence of a common resolution applicant across connected corporate debtors.

Cases where recoveries are grossly disproportionate to admitted claims without adequate valuation would also require closer examination. IBBI said the list is not exhaustive and professionals may examine other suspicious circumstances.

Preventing IBC Weaponisation

The regulator said agencies have flagged cases where CIRP may have been used to settle debts outside normal recovery mechanisms, reduce tax or other statutory liabilities, avoid regulatory scrutiny, limit the impact of investigations or penalties, and monetise or ring-fence assets.

Legal and insolvency experts said the proposed safeguards could help prevent vested interests from misusing the Insolvency and Bankruptcy Code (IBC). They noted that shell companies, proxy creditors and other arrangements could potentially be used to trigger insolvency proceedings for purposes unrelated to genuine resolution.

The proposed framework would place greater responsibility on insolvency professionals to identify suspicious cases and act as an additional safeguard against misuse of the insolvency process.

(KNN Bureau)