IBBI plan to handle murky transactions
Premium- As per IBBI, 708 applications on avoidance transactions worth ₹2 trillion are with tribunals as of 28 February
NEW DELHI : Corporate rescue plans stitched together by bankruptcy resolution professionals will have to specify how the past transactions of questionable nature by the bankrupt company’s suspended management will be pursued, according to a proposal from the Insolvency and Bankruptcy Board of India (IBBI).
The move is part of the bankruptcy rule maker’s set of proposals to make the restructuring of insolvent businesses more efficient.
This is expected to maximize the assets available for restructure and to bring clarity on how dubious transactions in the past by the defaulting company, called avoidance transactions, will be dealt with after the bankrupt company’s revival, according to a consultation paper issued by IBBI.
Also, taking action on these past transactions that adversely affect the value of assets available for a corporate restructure, could discourage market players from entering into deals with an insolvent debtor outside the bankruptcy resolution process.
The resolution professional hired by lenders to prepare the turnaround plan can request the tribunal to annul an undervalued transaction of the bankrupt company executed within a specified period prior to it becoming bankrupt.
According IBBI, 708 applications regarding avoidance transactions worth ₹2 trillion have been filed with tribunals as of 28 February 2022. Of these, only a handful of applications have been disposed of by the tribunals.
The resolution plan shall provide for the manner in which the proceedings with respect to avoidance transaction or fraudulent or wrongful trading will be pursued after the approval of the resolution plan, explained Pritika Kumar, founder of law firm Cornellia Chambers.
IBBI also suggested that operational creditors such as material and service suppliers can use goods and services tax (GST) forms filed with the tax authorities and the electronic permits used for goods shipments (e-way bills) to establish a default in payment by their clients. One of the key reasons for delays in bankruptcy cases getting admitted in tribunals is the delay in establishing a payment default.
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There is a time limit of 14 days for admission or rejection of a bankruptcy petition, but delays are caused because of difficulty in ascertaining existence of debt and default, the regulator said. Using GST documents could help in this context. The average time for admission of a bankruptcy case in tribunals, initiated by operational creditors was 650 days in FY22, IBBI said.
“Through this proposed amendment, there will be increased efficiency and clarity for the resolution professional, which will make the insolvency process more effective and efficient and will reduce delays and maximize the realization value during the process," Pritika said.
The regulator also suggested that an obligation should be imposed on lenders to provide all the relevant information they possess in terms of assets of the defaulting company to the resolution professional in a timely manner.