wo years post thecommencement of the IBC,there have been some successstories, especially in theinitial list of the ‘dirty dozen’companies who were referred

to resolution proceedings, but there is morethat is awaited with bated breath. Thissuccess is commendable considering pastefforts such as strategic debt restructuring(SDR) and of sustainable structuring ofstressed assets (S4A) have been lesssuccessful in resolving such cases1.Interestingly, several cases seeking resolutionunder the IBC also reported fraudulenttransactions.

As on September 2018, a total of 716 caseswere seeking resolution under the IBC, ofwhich 110 cases reported fraudulenttransactions worth over INR 400 billion2.Further, of the big 12 cases that were referredto the National Company Law Tribunal (NCLT)by the Reserve Bank of India (RBI) last year,suspected fraud was reported in nearly allcases.

The nature of fraudulent transactions inmost of these cases followed similar patterns -siphoning of funds through shell companiesor letters of credit, purchase of personalassets (under employees/relatives’ names)through company funds, transactions withrelated parties that are not at arms’ lengthand exceptional write-off in books tocamouflage fictitious receivables and assets.

Following the arrest of a promoter inconnection with a similar case, the FinanceMinistry issued a warning to public sector

banks to identify potential fraud in all NPAaccounts exceeding INR 50 crores or facecharges of criminal conspiracy3. We believesuch moves will bolster fraud riskmanagement and reporting efforts at banksand also improve collaboration betweenforensic professionals and resolutionprofessionals.

Currently, forensic professionals are calledupon by the Resolution Professional (RP)under section 25 of the IBC that casts a dutyon the RP to preserve and protect the assetsof the corporate debtor and file anapplication for avoidance of transactions, ifany, as per sections 43 to 51 of the IBC4, ifsuch transactions were preferential,undervalued, resulted in extortionate credit.

The intent of law makers to scrutinizecorporate defaulters is more focused than everbefore as is clear from the various legislationsrelating to stressed assets, both prior andpost commencement of insolvencyproceedings. Thus, it is only natural for thecorporate boardrooms, bankers and theresolution professionals to be more vigilant.The role and focus would vary keeping inmind the organisations’ progress intoinsolvency:

n Prior to insolvency – As the early signsof a corporate moving into an IBC stage startto appear, the role of the Board of Directorsbecomes critical. They need to keep a watchout for any management decisions oractivities resulting in significant cashoutflow, modification of accounts;manipulation/ deletion of records and officialdocuments and senior management exit. Anyor all of these could be tell-tale signs of

20 | Lex WITNESS | January 2019 A Lex Witness Privileged Partners Initiative

expertspeak

Deloitte India,

22nd Floor, DLF Epitome Tower,

Building No. 5, Tower A,

DLF Cyber City, DLF Phase II,

Gurgaon - 122002

E: inforensic@deloitte.com

T: 0124 669 5007

Impact of the Insolvency andBankruptcy Code (IBC) on Fraud

n Sumit Makhija & Aparna Gupta

T

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1Source: https://www.livemint.com/Industry/VBtrj6OrvHtSXcT6CngFbP/Bankruptcy-code-is-key-to-solving-Indias-bad-loan-mess.html2Source: https://economictimes.indiatimes.com/news/economy/finance/fraud-cases-under-ibc-cross-rs-40000-crore/articleshow/66015840.cms3Source: https://economictimes.indiatimes.com/news/economy/policy/finance-ministry-asks-psu-bank-ceos-to-check-frauds-in-npas-or-face-penal-action/articleshow/65502920.cms4Source: http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

either a fraud in making or an attempt tocover the skeletons of the past. It isinteresting to note that a lot of earlyindicators to fraud have been found in theinternal control/ audit reports of theCorporate Debtor that somehow get hiddenunder the carpet.

n Classification of an account asstressed asset – Bankers are privy tosignificant financial information of theCorporate Debtor (quarterly filing, ServiceOrganisation Control (SOC) reports etc.)and have instruments such as Asset QualityReviews (AQR) and the more recent-advisory to initiate forensic audits - tokeep a tab on the operations of theCorporate Debtor. Banks need to use thesemore effectively and efficiently to identifyinstances of fund siphoning and fictitiousassets (inventory) and receivables.

n Initiation of insolvency proceedings –

Once the CIRP (Chartered Insolvency andRestructuring Professional) is invoked, theIRP/ RP is assigned with the responsibilityof preserving the value of the CorporateDebtor and has authority to accessinformation from various sources tovalidate and review the transactions of thepreceding years. He must exercise hispowers to gather information from variousutilities, bankers and other sources andalso take into immediate custody the ITsystems/ records database to avoid deletion/manipulation of sensitive data; the omissionof which has appeared to be a majorhindrance in carrying out forensic reviews.

Fraud is a culmination of malafide intentand a control failure; while controlling anindividual’s intent may be a herculeantask, stakeholders must focus ontightening the noose to minimize theopportunity to exploit the gap.

Aparna Gupta is a Senior Manager

within Deloitte’s Forensic practice in

India. She has more than 11 years of

experience in the Consulting domain

and has worked across various risk and

financial advisory solutions. More

recently, she has been focused on the

IBC space leading some of the large

cases from an operational and forensic

perspective

Sumit Makhija is a Partner and leads

anti-bribery and corruption services

within Deloitte’s Forensic practice in

India. He is a Fellow member of the

Institute of Chartered Accountants of

India and a Certified Fraud Examiner

from the Association of Certified Fraud

Examiners, USA. He also serves a

Director on the India Chapter of

Association of Certified Fraud Examiners.

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