The Insolvency and the Bankruptcy Board of India (IBBI) has come out with a detailed document titled “Avoidance Transactions – Red Flags”. Avoidance transactions are those transactions by which properties are transferred before the commencement of the insolvency proceedings. Such transactions should be avoided as it affects the basic purpose of maximising the value of assets of the corporate debtors and its equitable distribution among the creditors.

Some of the red flags pointed out by IBBI are as follows:

• Large cash transactions undertaken by the insolvent entity.
• Admission of any claims on the basis of cash transactions.
• Non-existence of an office of the corporate debtor at the address mentioned in the records of the Ministry of Corporate Affairs.
• The presence of directors only for the name sake is also a red flag.
• Frequent changes of auditors.
• The independence of the auditor should also be considered.

Further, it is also mandatory on the part of the insolvency resolution professional to file an application with the adjudicating authorities (i.e. NCLT etc.) seeking return of the value lost in avoidance transactions.

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