Insolvency board makes it mandatory to list fraudulent trades in sale prospectus
The regulator's latest amendment to the Insolvency Resolution Process for Corporate Persons states that corporate restructure plans prepared by administrators appointed by creditors should only account for recovery from questionable deals and trades made by previous management that have been fully disclosed in the sale prospectus, known as the information memorandum.
The move aims to improve transparency in debt resolution processes and enable better price discovery.
The regulations proposed enhanced disclosures in the prospectus to include details of all identified avoidance transactions or fraudulent and wrongful trading.
Avoidance transactions are questionable deals carried out by the management before the company's admission in a tribunal for debt resolution. It includes siphoning off funds and questionable related party transactions.
'Further, the resolution professional is required to keep the information memorandum updated and provide the same to the committee of creditors (CoC) periodically,' the amended regulations said.
The new norms also say debt resolution plans should not assign the value of any avoidance transaction unless it was disclosed in the prospectus and was intimated to all the prospective investors before the last date for submission of their bids.
'These amendments aim to facilitate informed decision-making by the committee of creditors as well as the resolution applicants, leading to better price discovery and maximization of value for the assets of the corporate debtor,' IBBI stated.
Avoidance transactions, when reversed, enable value recovery from alienated assets, explained Anoop Rawat, senior partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co.
'Disclosing such transactions in the information memorandum enables all stakeholders to assess the potential for recovery. It will help to draw up better corporate rescue plans,' said Rawat. 'If it is not disclosed in the memorandum, it cannot be part of the resolution plan and any eventual recovery may go to the creditors, as per the amended regulations. There is, however, need for an enabling provision in the regulations for offering continued support to the successful bidder and the company to make recovery from such transactions.'
'Disclosing such transactions in the information memorandum enables all stakeholders to assess the potential for recovery and give a realistic proposal for the such transactions. It will help to draw up better corporate rescue plans,' said Rawat.
'The IBBI has prescribed that If it is not disclosed in the memorandum, it cannot be part of the resolution plan (apparently for lack of proper evaluation and valuation), and any recovery may go to the creditors, as per the amended regulations. There is, however, need for an enabling provision in the regulations for mandating continued support by the corporate debtor and resolution applicant for pursuing recovery from such transactions through intervention of adjudicating authority,' said Rawat.
The move seeks to enhance transparency and accountability under the debt resolution process, said Yogendra Aldak, partner at Lakshmikumaran and Sridharanattorneys.
'Mandatory disclosure of avoidance transactions, with an additional requirement to ensure the same is subsequently updated, will ensure that resolution applicants can have a more realistic outlook of the financials of the corporate debtor,' said Aldak.
"While we have witnessed resolution applicants treating the amounts under avoidance transaction as bad debts, even ascribing notional values such as ₹ 1 it is likely that in a competitive resolution process, prospective applicants are able to utilize these updated disclosures under the information memoranda resulting in higher recoveries for creditors,' Aldak added.
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Time of India
20 hours ago
- Time of India
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Advt Advt By , ETInfra Join the community of 2M+ industry professionals. Subscribe to Newsletter to get latest insights & analysis in your inbox. Get updates on your preferred social platform Follow us for the latest news, insider access to events and more. 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Hindustan Times
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