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Financial creditors need to come clean on ‘related party’

The Hindu Business Line |
Sundaresh Bhat, Partner
Business Restructuring Services

30 March 2018

He highlighted that the IBC disallows a financial creditor from exercising voting rights in the CoC, if such a creditor qualifies to be a related party to the corporate debtor. 

Insolvency regulations just got tightened to ensure that only genuine claims of financial creditors’ and not sham transactions get compensated under the Insolvency and Bankruptcy Code (IBC).

Come April 1, a financial creditor submitting a claim to an interim resolution professional (IRP) will have to declare if it is or not a ‘related party’ to the ‘corporate debtor’ facing an insolvency process.

The implication of being a ‘related party’ is that a financial creditor’s right to be part of the Committee of Creditors (CoC) under the insolvency process gets removed and, therefore, cannot vote in the decisions of the CoC.

Until now, there was no requirement for any such declaration although the IBC explicitly disallows a related party — to whom a corporate debtor owes a financial debt — from participating or voting in the CoC, said legal experts.

Unlike an operational creditor, a financial creditor can participate in the voting process of a CoC. Diwakar Maheshwari, Dispute Resolution Partner at Khaitan & Co, a law firm, said this categorical insertion in the declaration seems to be yet another positive step by the IBBI as it is in sync and brings conclusiveness to the IBC.

He highlighted that the IBC disallows a financial creditor from exercising voting rights in the CoC, if such a creditor qualifies to be a related party to the corporate debtor.

Sundaresh Bhat, Partner-Business Restructuring Services, BDO India, said this has been stipulated so as to ensure independence of financial creditors in the voting process and make sure the process is not compromised.

Punit Dutt Tyagi, Executive Director, Lakshmikumaran & Sridharan, a law firm, said that such a declaration is now required to be furnished along with the proof of claim by financial creditors under Form C.

Through this process, sham transactions can be weeded out and only the genuine claims and dues of parties will be compensated, Tyagi said.

Tyagi said the declaration will afford IRP a chance to scrutinise transactions between such financial creditors and corporate debtors, to ensure that these are carried out keeping in mind the arms-length principle.

The IRP also then ensures that the necessary permissions and compliances required under the Companies Act, 2013, for such related party transactions, have been duly obtained, he said.