New Delhi [India], September 10 (ANI): The Insolvency and Bankruptcy Board of India (IBBI) has warned against misuse of IBC provisions for tax avoidance and evading investigations, directing resolution professionals to stay vigilant against fraudulent actions that undermine corporate rescue proceedings.
According to a circular issued by IBBI, information received from law enforcement and regulatory bodies revealed that certain entities exploit the Insolvency and Bankruptcy Code, 2016 for purposes outside genuine debt resolution or liquidation.
"The Insolvency and Bankruptcy Board of India has received information from law enforcement and regulatory agencies that, in certain cases, the framework under the Insolvency and Bankruptcy Code, 2016 is being misused for purposes other than insolvency resolution or liquidation of the corporate debtor," the IBBI stated.
"Such instances include, inter alia, mitigating tax liabilities, closure/merger of companies without regulatory scrutiny, mitigating investigations, prosecution and penalties under various statutes, monetising and ring-fencing assets etc.," the circular noted.
The regulator pointed out that insolvency professionals possess direct access to corporate debtor books, financial records, and committee of creditors proceedings. Because of this access, professionals occupy a central role in spotting irregularities and must flag questionable conduct early.
The circular identified red flags such as corporate insolvency resolution processes initiated by a single non-institutional creditor who subsequently dominates the creditor panel, clusters of interconnected corporate entities entering insolvency simultaneously, or corporate debtors showing minimal competitive bidding alongside recurring resolution applicants.
Other flagged patterns include realisations to creditors grossly disproportionate to admitted claims without proper valuation, active fraud proceedings against the corporate group by other regulatory or enforcement agencies, and substantial inter-company loans or investments written off without sufficient basis.
"The indicators listed above are illustrative and not exhaustive. Some of these indicators may also arise in cases involving genuine financial distress or in the ordinary course of commercial operations," the IBBI circular noted.
"They are intended to flag circumstances that warrant closer examination, and no indicator, by itself, should be treated as conclusive of misuse of the insolvency process," the regulator added.
When encountering suspicious circumstances, insolvency professionals must conduct further enquiry based on records available during resolution or liquidation. The board emphasised that indicators gain critical importance when broader contextual reviews point to fraudulent intent.
"Where, upon such review, the IP forms a view, on reasonable grounds, that the process may be serving a fraudulent or malicious purpose other than the resolution of insolvency or liquidation of the CD, the IP shall make an application before the Adjudicating Authority (AA), setting out the relevant facts and materials and seeking such directions as the AA may consider appropriate under the Code," the regulator stated.
The application to the Adjudicating Authority must state the noticed indicators, the material examined, and the reasons establishing reasonable grounds of misuse. The circular has been issued under Section 196 of the Insolvency and Bankruptcy Code. (ANI)
IBBI alerts insolvency professionals against misuse of IBC framework for tax avoidance and evading investigations
