Insolvency professionals need to be wary of IBC abuse indicators: IBBI

New Delhi: The bankruptcy regulator has called on insolvency professionals (IPs) to be watchful of at least nine "indicators"-including the initiation of resolution process involving firms with no or negligible operations and assets, and such entities with substantial loans to or from related parties-to curb any potential abuse of law. The move, experts said, would discourage any unintended "weaponisation" of the Insolvency and Bankruptcy Code (IBC) by vested interests.

The move follows inputs from law-enforcement and other regulatory agencies indicating "that the CIRP (corporate insolvency resolution process) framework is, in certain cases, being resorted to with malafide intent," the Insolvency and Bankruptcy Board of India (IBBI) said in a draft circular issued on August 14.

It mandated the IP to investigate any suspicious patterns, form an opinion, and approach the National Company Law Tribunal where warranted, for its direction and penalty.


The regulator has sought stakeholder comments on the draft circular by August 24.

It also asked IPs to be especially vigilant of the CIRP of a corporate debtor with no or negligible operations, revenue or tangible assets, and persistently negative net worth, or the one with substantial loans or investments to or from related entities despite such absence of operations.

Cases needing closer scrutiny

Closer scrutiny, it noted, is also warranted in cases where internal control around related-party exposures is weak, or the CIRP is initiated by a single creditor who then dominates the committee of creditors, where valuers or auditors are unable to verify asset classes or where there is a common resolution applicant across connected corporate debtors.

"The proposal is significant because it shifts insolvency professionals from being process managers to becoming an active line of defence against abuse of the IBC," said Neeha Nagpal, founding and managing partner of N & Company Legal.