Insolvency law supervisor tweaks rules to boost transparency in bankruptcy process

By Beena Parmar

  • 21 Jul 2021
Credit: 123RF.com

In a bid to bring more accountability and improvement to the bankruptcy resolution process, the Insolvency and Bankruptcy Board of India (IBBI) has called for more disclosures and transparency. 

The IBBI has amended regulations that will now make sure a resolution professional (RP) provides details of “all former names and registered office address(es) of the corporate debtor (CD) changed in the two years preceding the commencement of insolvency along with the current name and registered office address, in all its communications and records”. 

The amended regulations enhance discipline, transparency, and accountability in corporate insolvency proceedings, the IBBI said in a release. The new regulations will be effective from 14 July. 

The IBBI supervises the Insolvency and Bankruptcy Code (IBC), a law established in December 2016 to resolve and recover the rising number of stressed assets and bad loans in the country. 

The amendments have been announced amid increasing lapses in the bankruptcy process leading to fears of backdoor entry of related firms, lower valuations, resolution amount being closer to liquidation value, and liquidation of going concerns. 

The regulations further state that any RP who is managing the bankrupt firm may appoint a professional, other than registered valuers, if he is of the opinion that the services of such professional are required and such services are not available with the CD. 

“Such appointments shall be made on an arm’s length basis following an objective and transparent process. The invoice for fee shall be raised in the name of the professional and be paid into his bank account," it said. 

Further, the RP is duty bound to find out if a CD has been subject to avoidance transactions such as preferential transactions, undervalued transactions, extortionate credit transactions, fraudulent trading and wrongful trading, and file applications with the National Company Law Tribunal (NCLT) or the adjudicating authority seeking appropriate relief. 

This not only claws back the value lost in such transactions increasing the possibility of reorganisation of the CD through a resolution plan, but also disincentivises such transactions preventing stress to the CD. For effective monitoring, the amendment requires the RP to electronically document and submit it to the IBBI intimating details of his/her opinion and determination in respect of avoidance transactions.