India's insolvency resolution framework has been transformed by the Insolvency and Bankruptcy Code (IBC), which offers a transparent and efficient mechanism for resolving troubled businesses. A crucial aspect of the IBC is the regulation of related party transactions, which aims to prevent abuse and ensure fairness in the insolvency process. This article explores the concept of related party transactions under the IBC and examines the regulatory framework surrounding them.
UNDERSTANDING RELATED PARTY TRANSACTIONS
The Insolvency and Bankruptcy Code, 2016 introduced the concept of "Related Party" in Section 5(24). Initially, the Code did not provide a specific definition for Related Party, but this was later addressed through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. The definition of Related Party under the Companies Act, 2013 was adopted for reference and implementation within the IBC framework. According to the IBC, a related party to a corporate debtor includes directors, partners, key managerial personnel, limited liability partnerships, partnership firms, private companies, public companies, body corporates, and individuals with significant control over the corporate debtor. These provisions ensure that a wide range of individuals and entities connected to the corporate debtor are considered related parties under the IBC.
REGULATORY FRAMEWORK FOR RELATED PARTY UNDER IBC
Section 21(2) of the IBC states that a related party who is also a financial creditor of the corporate debtor does not have the right to representation, participation, or voting in the Committee of Creditors (CoC) meetings. This provision aims to protect the rights of other financial creditors and prevent any bias towards the corporate debtor. Section 29A of the IBC prohibits the participation of related parties in the resolution process to ensure that companies or individuals with potential negative impacts on the insolvency resolution process are excluded. The disclosure of related parties is required under Section 29 of the IBC to safeguard the interests of creditors. Related parties are not granted voting rights in the resolution process to maintain an objective environment and protect the interests of the CoC and other creditors. The eligibility of related parties as resolution applicants is contingent upon clearing all their dues, as seen in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others. This emphasizes the importance of fulfilling financial obligations and clearing dues to address concerns related to related party transactions and become eligible for the resolution process under the IBC.
RELATED PARTY TRANSACTIONS
Related party transactions involve transactions between two parties with an existing relationship. The IBC includes provisions for the avoidance of certain transactions to protect the interests of creditors. Rule 35A of the CIRP Regulations assigns the responsibility to the resolution professional to review the corporate debtor's transactions during the lookback period to identify avoidable transactions. Preferential transactions and undervalued transactions with related parties within two years prior to the commencement of the Corporate Insolvency Resolution Process (CIRP) are considered avoidable transactions. The resolution professional reports such transactions to the adjudicating authority, which can order the reversal of the property or amount transferred through the transaction to ensure fair treatment of creditors during the CIRP. These provisions aim to prevent preferential treatment and undervaluation of assets in related party transactions, ensuring a fair and transparent resolution process where creditors are treated equitably.
Related party transactions have significant implications for the insolvency resolution process, including conflicts of interest, potential abuse of the framework, and equitable distribution of assets among creditors. Judicial precedents and case studies provide insights into the consequences of related party transactions under the IBC, highlighting the need for robust regulation.
To sum up, the Insolvency and Bankruptcy Code's regulation of related party transactions is crucial for ensuring fairness, transparency, and equitable treatment of creditors during the insolvency resolution process. The code defines related parties and establishes guidelines and safeguards to prevent abuse and protect stakeholders' interests. By scrutinizing these transactions, the code aims to prevent preferential treatment, undervaluation of assets, and conflicts of interest. Involvement of the resolution professional and the Committee of Creditors adds oversight and transparency to the process. Judicial precedents and case studies highlight the need to address related party transactions effectively and uphold the integrity of the insolvency resolution process. Best practices such as independent valuations, expert opinions, and strong governance mechanisms contribute to fair assessments and prevent potential abuse. Overall, the regulation of related party transactions under the IBC is crucial for maintaining trust, confidence, and a level playing field for all involved parties.