IBBI comes out with ‘Red flag’ document to aid insolvency professionals

The Insolvency and Bankruptcy Board of India has come out with a ‘Red Flags’ document that would serve as a guide to insolvency professionals (IPs) during the corporate insolvency resolution process (CIRP) and help detect if the corporate debtor has been subjected to any ‘avoidance transactions’.

‘Avoidance transactions’ include preferential, fraudulent, undervalued and extortionate transactions.

The Insolvency and Bankruptcy Code (IBC) casts an obligation on the IP to file an application to the Adjudicating Authority (AA) for appropriate directions if such avoidance transactions were to be detected. This Red Flag document is an initiative aimed at educating the IPs and providing information on the likely red flags that could be encountered during CIRP.

MS Sahoo, Chairman, Insolvency and Bankruptcy Board of India (IBBI), told BusinessLine that Insolvency law frowns on alienations of property prior to the commencement of the insolvency proceeding, if it vitiates the sanctity of equitable distribution ( pari passu treatment of the creditors of the same class) and maximisation of the value of the assets of a corporate debtor.

“Such alienations are called avoidance transactions. They vitiate insolvency proceedings. An insolvency professional is duty bound to file an application with the adjudicating authority seeking claw back of the value lost in avoidance transactions. The red flags will alert an insolvency professional if and where the corporate debtor has been subjected to avoidance transactions, and facilitate him pursue the matter further,” he said.

Sumit Batra, Partner, India Law Alliance, a law firm, said that the Red Flag document released by IBBI not only highlights various potential instances which require investigation by IPs but will also provide assistance on vital aspects while highlighting the problems/flaws that were being faced by the IPs since the introduction of IBC in 2016.

“This document is of assistive value to the IPs and not a binding document per se as duties of IP as enshrined under IBC already provide an exhaustive list of duties to be performed by the IPs. Such a document only provides insight into the procedure to be followed based on the experiences of IPs who have been handling CIRP cases since the introduction of IBC,” he said.

Sushmita Gandhi, Partner, IndusLaw, said that IBBI’s new initiative of Red Flag document comes in as breather to IPs guiding them to identify and determine if corporate debtor has been subjected to Avoidance transactions — such as preferential treatment, fraudulent/undervalued transactions.

Rajiv Chandak, Partner, Deloitte India, said that going forward, resolution professionals will have the benefit of referring to this document to explore potential risk areas on a case by case basis.

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