IBC reform helps insolvency professional assess avoidance transactions

Recent amendments by the Insolvency and Bankruptcy Board place the insolvency professional at the fulcrum of the resolution process.

The recent amendments by the Insolvency and Bankruptcy Board of India (IBBI) via the IBBI (Corporate Insolvency Resolution Process or CIRP) (second amendment) Regulations, 2021, are welcome steps towards bringing in greater transparency and accountability in conducting resolution processes under the Insolvency and Bankruptcy Code (IBC), 2016.

Once the CIRP is initiated, an insolvency professional (IP) is appointed. The IP steps in the shoes of the board of directors and management to take charge of the corporate debtor. The code details the various duties of the IP with the objective of preserving the value of the debtor. The objective of the CIRP is to promote entrepreneurship and give fresh life to an asset, besides maximising its value. This can be achieved when a potential Resolution Applicant (RA) puts together a plan which is then put to a vote in front of the Committee of Creditors (CoC) and approved by the adjudicating authority, i.e., the National Company Law Tribunal (NCLT). The whole process is time-bound and should be ideally completed in 180 days from the date of admission. The IBC regulations also provide for a mandatory outer limit of 330 days for resolution processes. 

Let us look at the major changes brought in by the amendments: 

Identifying prejudicial/avoidance transactions

The IP is responsible for forming an opinion (on or before the 75th day) on whether the erstwhile board of directors/promoters has carried out any transactions (avoidance transactions) that are prejudicial to the interest of the stakeholders. Based on the opinion formed, the IP appoints the transaction auditor who carries the look-back review for two years or more, as the case may be. Avoidance transactions, once identified (on or before the 115th day), shall be categorised either as preferential, undervalued, fraudulent or extortionate, as described by the code. The report--in the form of a petition--is to be filed (on or before the 135th day) before the NCLT. 

Accordingly, the tribunal adjudicates on the petition as deemed necessary to neutralise the effect of such transactions by either reversing the transaction or replenishing the stakeholders for the loss made by the parties involved. 

The IBBI has time and again followed various methods to make the resolution process time-bound and effective. One such method is the introduction of various CIRP forms which are to be filed by the IP as per the stipulated timelines for each form. A small penalty is imposed in case of delay in filing the forms. 

Filing of Form CIRP 8 to report avoidance transactions

The IBBI introduced the new Form CIRP 8 on 20 July 2021. This form is to be filed by the IP to share the details of their opinion and determination on avoidance transactions. This form is to be filed on or before the 140th day of the CIRP, i.e. post filing the application with the adjudicating authority.

This form requires the IP to provide details such as the nature of avoidance transactions, date, directors/partners involved during such transactions, beneficiaries and value underlying. Additionally, an IP has to provide an opinion on the potential date of the CIRP initiation (had the directors/partners known of no reasonable prospect of avoiding such commencement of CIRP), actual date of initiation and assessment of the potential loss to creditors. The form also requires reasons to be provided in case there is a failure in determining any avoidance transactions. The form specifically focuses on fraudulent transactions, thus creating an additional task for the transaction auditor, that of assessing the potential loss caused by delaying the CIRP process.  

Potential challenges

It is pertinent to note that the role of the IP is significant but only for a limited time period. The IP steps into the shoes of the management and takes decisions to preserve the value of the corporate debtor. However, assessing the transactions could result in the IP deviating from the process. Post the 100th day of the CIRP, the IP would already be tasked with finding the genuine potential RA, conducting the right valuation, assessing the plan, convening numerous CoC meetings, and ensuring approval. A process is effective when the duties are divided efficiently. But too many tasks and responsibilities are likely to make the IP a ‘master of none’--not ideal considering that the IP is appointed to ensure that the process is time-bound and effective.

Therefore, it is a good move to make the IP assess the depth of avoidance transactions as they are in the driver’s seat. But it may also be beneficial to ensure that the IP’s assessment is based on and subject to the facts presented and opinion received by the transaction auditor. 

In conclusion, the introduction of such measures certainly brings in more accountability and places the IP at the fulcrum of the resolution process. This will ensure that the process is conducted impartially and smoothly with specific focus on avoidance transactions.

(Dinesh Arora is Partner and Leader--Deals, PwC India. The views expressed in this article are personal.)