IBBI Study Recommends Enhanced Debt Monitoring, Expanded Role for Resolution Professionals in Fraud Detection

New Study Calls for Resolution Professionals to Take Pro-Active Role in Identifying Financial Foul Play

The Insolvency and Bankruptcy Board of India (IBBI) has released a study, titled 'Study on Resolution Professionals,' which emphasizes the need for resolution professionals to take a more aggressive role in identifying and reporting fraudulent activities during the Corporate Insolvency Resolution Process (CIRP).

Under the Insolvency and Bankruptcy Code (IBC), a resolution professional is appointed by the Committee of Creditors (CoC) to manage a struggling company during its insolvency process. Their primary job is not only to help the company pay its dues but also to take over management, keep the business running, and find a way to maximize the company's value.

Since 2016, instances have been reported where resolution professionals have been criticized for failing to actively investigate or pursue fraudulent or preferential transactions during the CIRP. For example, in Anuj Jain v. Axis Bank Ltd. (2020), the Supreme Court of India examined preferential transactions related to the insolvency of Jaypee Infratech Limited, emphasizing the importance of scrutinizing suspect transactions before insolvency.

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Comparison of Key Cases:

The study suggests that resolution professionals must identify and highlight fraud transactions undertaken with the help of independent forensic experts. However, it does not recommend any specific actions that be initiated against the RPs despite failing on this front. Forensic audit skills are required to analyze transactions, trace asset diversion, identify financial statement fraud, and gather legally admissible evidence of fraud or misconduct.

Experts say that while the IBC continues to evolve addressing new challenges, IBBI is tasked with protecting the interest of stakeholders and enforcing discipline in the process. Resolution professionals play a critical role in the success or failure of any CIRP. If they adopt a passive approach, there is a risk that assets may be dissipated, key evidence may be lost, or fraudulent transactions may go unchallenged, ultimately reducing recoveries for creditors.

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Section 47 of the Insolvency and Bankruptcy Code ensures that a failure on the part of the RP or liquidator to report avoidance transactions does not go unchecked. The provision empowers the Adjudicating Authority (AA) to direct the filing of an appropriate application and require the IBBI to initiate disciplinary proceedings against such professionals.

The IBBI has rules in place to penalize the RP if they are found to not exercise due diligence in detecting fraudulent transactions. However, sources say that the regulator feels an increasing need to enhance monitoring of the RPs to act beforehand. Measures such as stronger conflict-of-interest disclosures, enhanced regulatory monitoring by the IBBI, and stricter penalties for deliberate concealment of fraudulent transactions by the resolution professionals are under consideration by the regulator.