Proposed IBC amendments put spotlight on past deals of bankrupt firms
- There is a proposal to modify the ‘look-back period’ so that resolution professionals, hired by lenders to run bankrupt firms, can look into past transactions in a specified period, starting from the date of bankruptcy filing rather than from the date of their admission by tribunals
Insolvency resolution professionals and liquidators will soon be able to look further into the past of bankrupt firms to see if their pre-bankruptcy transactions were in order and, if not, seek tribunal orders to annul them.
New proposals from the ministry of corporate affairs seek to extend the oversight of resolution professionals over a longer period of pre-bankruptcy financial stress by the corporate defaulter.
The proposal is to modify this ‘lookback period’ so that resolution professionals hired by lenders to run bankrupt firms can look into transactions of a specified period starting from the date of bankruptcy filing rather than from the date of their admission by tribunals. The idea is that judicial delays in cases getting admitted should not delay a review of past transactions by sinking companies.
At present, a resolution professional can request a tribunal to annul an undervalued transaction of the bankrupt firm dating back up to two years in the case of related party transactions and up to one year in the case of other transactions.
Experts said the move to tweak the lookback period was a logical choice to improve the outcome of bankruptcy resolutions. When a corporate debtor starts facing problems because of operational reasons or fraud, banks try to resurrect the loans so that they do not become non-performing assets (NPAs).
When these options don’t work out, they bring it to resolution under the Insolvency and Bankruptcy Code (IBC).
To that extent, if somebody has consciously defrauded or made a preferential transaction, it happens before an account becomes an NPA, explained Tarun Bhatia, managing director and head of South Asia in the forensic investigations and intelligence practice of financial risk advisory firm Kroll.
“Our own experience of looking at avoidance-related matters shows that at times even two years is not enough. It is a good development and has been suggested by different stakeholders for a while, so that any time lag between admission and application is not used as a cover to do these avoidance transactions,” said Bhatia.
The idea is that if a review of past deals starts early, transactions that may harm the interests of all stakeholders could be reversed before it is too late.
The move to improve the outcome of bankruptcy resolutions comes after a parliamentary panel in August suggested that the government should revisit the IBC to improve its outcomes.
The corporate affairs ministry has sought comments from the public for the proposals released on Thursday.
The emphasis on improving the efficiency of IBC comes in the context of a majority of the companies ending up in bankruptcy tribunals getting liquidation orders. In many cases, lenders are forced to take large haircuts as part of a restructure. Also, in many cases, protracted litigation among shareholders, lenders and potential investors have delayed the resolution plan.
The ministry expects that commencing a review of past transactions by the corporate debtor from the date of bankruptcy filing will discourage the shareholders from delaying the case getting admitted in tribunals for resolution.
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First Published:24 Dec 2021, 06:05 PM IST
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