IBBI flags misuse of insolvency process to settle debts, evade liabilities

The Insolvency and Bankruptcy Board of India (IBBI) has flagged instances of companies using the corporate insolvency resolution process (CIRP) for purposes other than resolving insolvency, including settling debts outside the normal recovery process, mitigating tax and other statutory liabilities and shielding assets from regulatory scrutiny.

In a discussion paper issued on Friday, the insolvency regulator said it had received information from law-enforcement and other regulatory agencies indicating that the CIRP framework was being used in some cases with fraudulent or malicious intent.

According to IBBI, such misuse includes attempts to close or merge companies without regulatory scrutiny, mitigate the impact of pending or anticipated investigations, prosecutions and penalties, and monetise or ring-fence assets.

The regulator has now proposed detailed guidance requiring insolvency professionals (IPs) to conduct due diligence at an early stage to identify signs that a CIRP may have been initiated for an ulterior purpose.

IPs to be more vigilant

IBBI said insolvency professionals are uniquely placed to identify such cases because they have access to the corporate debtor’s books, financial records, assets and the proceedings of the Committee of Creditors.

It said existing provisions of the Insolvency and Bankruptcy Code already place a non-delegable duty on IPs to examine such indicators and, where necessary, bring them before the adjudicating authority.

The proposed guidance is intended to consolidate these existing requirements and bring greater consistency in how insolvency professionals identify and report possible abuse. IBBI clarified that the proposed circular does not create any new substantive obligation but explains duties that already flow from the IBC and its regulations.

What will trigger scrutiny?

IBBI has set out an illustrative list of warning signs that insolvency professionals should examine.

These include companies with little or no operations, revenue or tangible assets and persistently negative net worth. Large loans, advances or investments involving related or group entities, particularly where such amounts have been written off or shown as doubtful without adequate basis, would also warrant scrutiny.

Other red flags include qualified audit opinions on the recoverability of related-party loans and investments, or concerns over internal controls around related-party exposures.

IBBI has also asked IPs to look for links between the corporate debtor and regulatory or enforcement proceedings involving alleged diversion or fraudulent disbursement of funds.

Single-creditor insolvency cases under scanner

One of the more significant warning signs identified by the regulator is a CIRP initiated by, or debt assigned shortly before insolvency proceedings to, a single creditor that subsequently dominates the Committee of Creditors.

IBBI has also flagged clusters of companies with common promoters, addresses or directors, or companies with significant inter-lending, being pushed into CIRP around the same time with overlapping CoCs.

Minimal competition in the resolution process is another red flag, particularly where the same resolution applicant repeatedly appears across connected corporate debtors. IBBI has also flagged cases where recovery to creditors is grossly disproportionate to admitted claims without adequate valuation support.

Action under Section 65

Where an insolvency professional finds that a CIRP may have been initiated fraudulently or with malicious intent, the proposed guidance requires the IP to examine the circumstances and form a considered opinion.

If the IP concludes that the process was initiated for a purpose other than resolution or liquidation, the professional would have to approach the adjudicating authority under Section 60(5) read with Section 65 of the IBC for appropriate directions and penalty. This would be in addition to any action warranted under provisions dealing with preferential, undervalued, extortionate or fraudulent transactions.

Section 65 already empowers the adjudicating authority to impose a penalty where CIRP has been initiated fraudulently or with malicious intent for a purpose other than resolution or liquidation.

Guidance to apply to ongoing cases

The proposed circular is intended to apply to all ongoing and future assignments of insolvency professionals acting as interim resolution professionals or resolution professionals under the IBC.

IBBI has invited comments from insolvency professionals, creditors, resolution applicants, corporate debtors, investors, lawyers and other stakeholders. Comments can be submitted electronically by August 24, 2026.

The move comes as the insolvency regulator seeks to prevent CIRP from becoming an alternative tool for debt settlement, regulatory arbitrage or asset protection, rather than a process for genuine resolution of distressed companies.

Also Read: ED arrests insolvency professional in Best Foods money laundering case