IBBI Flags Potential Misuse Of Insolvency Process, Calls For Enhanced Due Diligence By Insolvency Professionals

New Delhi, Sep 11 (KNN) The Insolvency and Bankruptcy Board of India (IBBI) has directed insolvency professionals (IPs) to remain vigilant and conduct due diligence where circumstances suggest that the insolvency process may be misused for purposes other than resolution or liquidation of a corporate debtor.

In a September 9, 2026, circular issued under Section 196 of the Insolvency and Bankruptcy Code (IBC), 2016, the regulator said it had received information from law enforcement and regulatory agencies about instances of the IBC allegedly being used to mitigate tax liabilities, avoid regulatory scrutiny, investigations or penalties, and monetise or ring-fence assets.

IBBI Lists Red Flags

The IBBI identified several indicators that IPs should examine during the corporate insolvency resolution process (CIRP). These include cases where insolvency is initiated by, or debt is assigned shortly before initiation to, a single creditor other than a scheduled bank or public financial institution, which subsequently dominates the committee of creditors (CoC).

Other indicators include clusters of corporate debtors with common promoters, addresses, directors or inter-lending arrangements entering CIRP within a short period, particularly where their CoCs have overlapping compositions.

The regulator also flagged minimal competitive participation in resolution proceedings and repeated participation by the same resolution applicant across connected corporate debtors.

Further red flags include creditor realisations that are grossly disproportionate to admitted claims without adequate valuation, links between a corporate debtor or its group and fraud-related proceedings by another regulator or enforcement agency, and substantial loans, advances or investments involving related entities that have been written off or classified as doubtful or nil without adequate basis.

IPs Must Conduct Further Enquiry

The IBBI clarified that the indicators are illustrative and not exhaustive. It said such circumstances may also arise in cases involving genuine financial distress or ordinary commercial operations.

The regulator clarified that no single indicator should be treated as conclusive evidence of misuse of the insolvency process.

Where one or more indicators are identified, IPs must conduct further enquiry based on records and information available during the normal course of the CIRP or liquidation process.

The IBBI said an indicator becomes significant when a “holistic and contextual assessment” suggests that the insolvency process may be serving a fraudulent or malicious purpose other than resolution or liquidation.

Where an IP forms a reasonable view that such misuse may be taking place, the professional must approach the adjudicating authority with the relevant facts and material and seek appropriate directions under the IBC.

The application must identify the indicators observed, the material relied upon and the reasons for forming the view that the process may be serving a fraudulent or malicious purpose.

The IBBI said IPs are well placed to identify such concerns because of their access to corporate debtors' books and records and CoC proceedings. 

(KNN Bureau)