Insolvency regulator issues list of red flags on avoidance transactions
Certain categories of enterprises operating in domains such as trading infrastructure, construction, EPC contracts, real estate, power, Steel etc are more prone to avoidance transactions than others, according to a comprehensive list prepared by the Insolvency and Bankruptcy Board of India (IBBI) to identify red flags indicating possible avoidance transactions.
The insolvency regulator has released the list in an effort to help insolvency professionals identify red flags on avoidance transactions by an insolvent company.
The comprehensive list of red flags have been put in six broad categories such as entity, group and operations; maintenance of Books and Records, Regulatory Compliance and Litigation, etc for the convenience of the insolvency professionals who act as resolution professionals or liquidators.
The list has some interesting tell-tale signs transactions that could be fraudulent in nature. For example, large values of prior period items, transaction reversals, write-off of inventories or receivables, large provisions for obsolescence of inventory etc in the books of an insolvent company may indicate possible avoidance transactions.
It list also has mentions complex or unusual transaction structures such as sole selling arrangements, sole buying arrangements, pre-buy decisions, single sourcing strategies without competitive sourcing, high level of import – export and other related forex transactions etc as possible red flags.
High level of trading transactions in case of non -trading entities, predominance of cash transactions, unusual variance in the scale of operations or in the components of the financial statements across years, etc are also possible indicators of avoidance transactions.
The list further has entries like absence of a competent team, disqualification of directors for non-filing and frequent change in directors, key managerial positions, etc as potential red flags. And then the presence of a large number of related or connected entities, large tractions with related entities, etc should also raise doubts among the IPs looking for red flags.
Non-maintenance of proper books, missing registers of inventory, loss of partial books of accounts, etc could also point towards involvement of the insolvent company in any short of avoidance transactions.
The insolvency law requires the resolution professional and the liquidator to identify if an insolvent company has undertaken any Avoidance transactions such as preferential, fraudulent transactions, undervalued or extortionate transactions in the past, and if it finds the company involved in such transactions, the formers are required report to the Adjudicating Authority for appropriate directions. The law even mandates the resolution professional or the liquidator to facilitate the claw-back or disgorgement of value lost through such avoidance transactions.
