IBBI CLARIFIES ROLE OF RP & LIQUIDATOR IN AVOIDANCE TRANSACTIONS

“IBBI Clarifies Role of RP & Liquidator in Avoidance Transactions.”

  • Overview

The Insolvency and Bankruptcy Board of India (IBBI) vide Facilitation / 001 / 2020 dated 08th May, 2020 has issued circular on “Role of Resolution Professional / Liquidator in respect of Avoidance Transactions for educating the IPs and other stakeholders.

of corporate insolvency resolution and liquidation processes

The Circular was issued to:

  • All Registered Insolvency Professionals
  • All Registered Insolvency Professional Agencies
  • All Recognized Insolvency Professional Entities
  • (By mail to registered email addresses)
  • Other stakeholders (On website of IBBI).
  • Key Highlights of the Circular:
  • Provisions related to the duties of a Resolution Professional (RP) and a Liquidator

Under the Insolvency and Bankruptcy Code, 2016 (Code), Section 25 deals with  the duties of a Resolution Professional (RP) and Section 35 deals with  the duties of a Liquidator which includes certain actions in respect of avoidance transactions(preferential transactions, undervalued transactions, extortionate transactions, and fraudulent trading).

  • Provisions related to the Filing applications with the Adjudicating Authority

Sections 43, 45, 50 and 66 of the IBC Code mandate the RP and the Liquidator to file applications with the Adjudicating Authority (AA) seeking appropriate reliefs and directions permissible under the Code.

  • Provisions related to disciplinary action

Section 47 of the Code, inter alia, provides that the AA shall require the Insolvency and Bankruptcy Board of India (Board) to initiate a disciplinary action against the RP or the Liquidator, as the case may be, where he has not reported undervalued transactions to the AA.

Resolution Professional (RP) has to form an opinion whether the corporate debtor (CD) has been subjected to any avoidance transaction on or before the 75th day of the insolvency commencement date (ICD) Pursuant to Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Where he is of the opinion that the Corporate Debtor (CD) has been subjected to any transactions covered under the aforesaid sections, he shall make a determination, on or before the 115th day of the ICD, under intimation to the Board. Further, he shall apply to the AA for appropriate relief on or before the 135th day of the ICD

The IBBI, in consultation with the three Insolvency Professional Agencies issued an indicative charter of insolvency professional and the committee of creditors (CoC) responsibilities on 1st March, 2020  to have a complete and clear understanding of their roles and responsibilities in a CIRP.

In the following judgements, the IBBI has clarified that once transactions are held as preferential; it is not necessary to examine whether these are undervalued and/or fraudulent:

i) Mr. Ram Ratan Kanoongo Applicant Vs. Mr. Sunil Kathuria & Others. [MA 436/2018

in CP No.172/IBC/NCLT/MB/MAH/2017]

“The AA observed that if there is a syphoning off funds of the CD, it is important that the same be brought back for the completion of liquidation proceedings. It held: “Section 43 & 45 start with the phrase “Where the liquidator or the RP…….”, hence it can be understood that the avoidance or preferential or undervalued transactions can be handled even at the stage of Liquidation.”

ii) Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited Vs. Axis Bank Limited Etc. Etc. [Civil Appeal Nos. 8512-8527/2019]

The Supreme Court clarified the duties and responsibilities of the RP in respect of avoidance transactions. It held that the RP shall-

(i) sift through all transactions relating to the property/interest of the CD backwords from the ICD and up to the preceding two years;

(ii) identify persons involved in the transactions and put them in two categories: (a) related party under section 5(24), and (b) remaining persons;

(iii) identify which of the said transactions of preceding two years, the beneficiary is a related party of the CD and in which the beneficiary is not a related party. The sub-set relating to unrelated parties shall be trimmed to include only the transactions preceding one year from the ICD;

(iv) examine every transaction in each of these sub-sets to find out whether (a) the transaction is of transfer of property of the CD or its interest in it; and (b) beneficiary involved in the transaction stands in the capacity of creditor/surety/guarantor;

(v) scrutinise the shortlisted transactions to find, if the transfer is for or on account of antecedent financial debt/operational debt/other liability of the CD;

(vi) examine the scanned and scrutinised transactions to find, if the transfer has the effect of putting such creditor/surety/guarantor in beneficial position, than it would have been in the event of distribution of assets under section 53. If answer is in the affirmative, the transaction shall be deemed to be of preferential, provided it does not fall within the exclusion under section 43(3); and then

(vii) apply to the AA for necessary orders, after carrying out the aforesaid volumetric and

gravimetric analysis of the transactions

It clarified that once transactions are held as preferential; it is not necessary to examine whether these are undervalued and/or fraudulent. Under sections 45 and 46 where the AA is required to examine the intent, if such transactions were to defraud the creditors.

Source: https://www.ibbi.gov.in/uploads/whatsnew/3d9849d4c72be198d901ba78006005cf.pdf

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