IBC suspension leaves door open for fraud: Experts

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IBC suspension leaves door open for fraud: Experts

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As per the ordinance issued on Friday, proceedings under the Insolvency and Bankruptcy Code can never ‘ever’ be filed for defaults occurring during the suspension period. This implies that promoters of companies that have the capacity to repay dues could force a default during this period and never be held accountable under the IBC, experts said.

The government’s decision to suspend initiation of fresh insolvency proceedings for six months from March 25 might be a blessing for many companies impacted by the Covid-19 outbreak and the lockdown, but it also leaves the door open for fraud, experts warn.

As per the ordinance issued on Friday, proceedings under the Insolvency and Bankruptcy Code can never ‘ever’ be filed for defaults occurring during the suspension period. This implies that promoters of companies that have the capacity to repay dues could force a default during this period and never be held accountable under the IBC, experts said.

“While this bars creditors from initiating insolvency under the IBC, though they have other measures outside the IBC albeit with a lot of time consuming litigation, promoters in the meantime may try to siphon off assets, manipulate the books, or divert cash flows and exit the business,” said Sundaresh Bhat, partner and leader, business restructuring services, at professional services firm BDO India.

The government suspended Sections 7, 9, and 10 of the IBC to protect corporate borrowers impacted by the Covid-19 crisis for six months from the day the national lockdown began.

Section 7 allows a financial creditor to initiate corporate insolvency resolution process against a corporate debtor, Section 9 provides for application of insolvency by an operational creditor, and Section 10 is for initiation of insolvency resolution proceedings by a corporate applicant.

The ordinance grants protection to company directors and partners with the same terms of suspension on Section 66 of IBC, which relates to fraudulent transactions done with intent to defraud creditors or for fraudulent purpose where a company law court can order the accused to pay up any amount it sees fit, if the claims are substantiated.

Source- Economic Times.