Avoidance Transactions: New Amendment Mandates Disclosure in Information Memorandum

With a view to strengthening disclosure requirements with respect to avoidance transactions in the information memorandum, the Insolvency and Bankruptcy Board of India (IBBI) has notified amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

A significant value of insolvent entities is often tied up in underlying avoidance transactions (preferential, undervalued, extortionate and fraudulent transactions) carried out by the corporate debtor prior to the initiation of the Corporate Insolvency Resolution Process (CIRP). Under the Insolvency and Bankruptcy Code, 2016 (IBC), the resolution professional or liquidator is required to file applications in respect of avoidance transactions found by him during CIRP and liquidation processes before the Adjudicating Authority, seeking appropriate directions.

Gaps in the Previous Framework

Earlier, the CIRP Regulations did not explicitly provide for a comprehensive disclosure of such identified avoidance transactions in the information memorandum and its subsequent updates. Further, there was no clear mandate that updated versions of the information memorandum have to be provided to the committee of creditors and prospective resolution applicants.

This led to scenarios where prospective resolution applicants did not have access to complete information about avoidance transactions before submitting their plans, leading to reduced transparency and information asymmetry.

The Board, in view of the above, notified amendments to the CIRP Regulations.

CIRP Amendment Regulations: Key Changes

The Amendment Regulations introduce the following changes:

• Periodic updates to information memorandum: Prior to the amendment, Regulation 36(1) specified that resolution professionals must submit the information memorandum in electronic form to each member of the committee on or before the 95^th day from the insolvency commencement date. The amendment now adds, “and its subsequent updates thereof”, ensuring that the information memorandum is regularly updated by the resolution professional and shared with the committee of creditors and prospective resolution applicants.

• Disclosure of avoidance transactions in information memorandum: The new amendments require disclosure of all identified avoidance transactions in the information memorandum. This is as per the newly added clause (ha) in Regulation 36(2). This clause states that the information memorandum should contain “details of all identified avoidance transactions, if any, under Chapter III or fraudulent or wrongful trading under Chapter VI of Part II of the Code and subsequent filings before the Adjudicating Authority, as referred under sub-regulation (3A) of regulation 35A.”

The above clause, read with the amended Regulation 36(1), ensures that the committee of creditors is consistently apprised of any additional avoidance transactions or developments.

• Undisclosed avoidance transactions cannot be assigned under resolution plan: The Amendment Regulations introduce sub-regulation (2A) in Regulation 38, making it clear that avoidance transactions under Chapter III or fraudulent or wrongful trading under Chapter VI of Part II of the Code cannot be assigned under the resolution plan if they were:

• • not disclosed in the information memorandum; and
  • not intimated to all prospective resolution applicants under Regulation 35A(3A) before the last date for submission of resolution plans.

This provision will not apply to resolution plans submitted to the Adjudicating Authority under Section 30(6) of the IBC on or before July 4, 2025, the date on which the amendments came into force.