The Insolvency and Bankruptcy Board of India (“IBBI”) has issued Circular No. IBBI/CIRP/105/20261 dated September 09, 2026, directing Insolvency Professionals (“IPs”) to exercise due diligence and remain vigilant against potential misuse of the insolvency framework under the Insolvency and Bankruptcy Code, 20162. (“IBC” or “Code”).
The circular follows information received by the IBBI from law enforcement and regulatory agencies regarding instances where the insolvency framework may allegedly be used for purposes other than insolvency resolution or liquidation of the Corporate Debtor (“CD”). These purposes include mitigating tax liabilities, facilitating closure or merger of companies without regulatory scrutiny, mitigating investigations, prosecution or penalties under various statutes, and monetising or ring-fencing assets.
Accordingly, the IBBI has identified certain circumstances that may indicate potential misuse and outlined the steps IPs are expected to take when such circumstances arise.
Indicators of Potential Misuse
The circular identifies several indicators that IPs should pay particular attention to during the CIRP or liquidation process. These include:
- Concentrated Creditor Initiation: CIRP being initiated by, or debt being 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”).
- Connected Corporate Debtors: A cluster of CDs having common promoters, addresses, directors or inter-lending arrangements being admitted into CIRP within a proximate timeframe, particularly where there is an overlap in the composition of their respective CoCs.
- Limited Competitive Participation: Minimal competitive participation in the resolution process or the recurrence of a common resolution applicant across connected CDs.
- Disproportionate Realisation: Realisation to creditors being grossly disproportionate to the admitted claims without adequate support from a proper valuation exercise.
- Regulatory or Enforcement Proceedings: A connection between the CD or its group and an order or ongoing proceeding before another regulator, enforcement or investigating agency concerning fraud.
- Related-Party or Group Transactions: Substantial loans, advances or investments to or from related or group entities despite the absence of operations, particularly where such amounts have been written off or classified as doubtful or NIL without an adequate basis.
The IBBI has clarified that the above indicators are illustrative and not exhaustive. Importantly, the presence of any one indicator does not, by itself, establish misuse of the insolvency process. The circular recognises that some of these circumstances may also occur in cases involving genuine financial distress or in the ordinary course of commercial operations.
Further Enquiry by Insolvency Professionals
Where an IP notices one or more of the identified indicators, or other circumstances of a similar nature, the IP is required to undertake such further enquiry as may be warranted on the basis of records and information available in the ordinary course of the CIRP or liquidation process.
The circular places emphasis on a holistic and contextual assessment. An indicator assumes significance where the circumstances, when considered collectively, suggest that the CIRP or liquidation process may be serving a fraudulent or malicious purpose other than the resolution of insolvency or liquidation of the CD.
Thus, the circular does not require IPs to treat the existence of an identified indicator as conclusive evidence of misuse. Instead, it requires closer examination of the circumstances and material available to the IP in the course of the insolvency process.
Application Before the Adjudicating Authority
Where, following such review, an IP forms a view on reasonable grounds that the insolvency process may be serving a fraudulent or malicious purpose other than resolution or liquidation, the circular requires the IP to make an application before the Adjudicating Authority (“AA”).
The application is required to set out the relevant facts and materials and seek such directions as the AA may consider appropriate under the Code. The IP is also required to identify the indicators noticed, the material relied upon, and the reasons forming the basis of the view that the process may be serving an improper purpose.
This ensures that the determination of the appropriate course of action remains before the Adjudicating Authority, based upon the facts and material placed before it.
Conclusion
The circular seeks to strengthen vigilance within the insolvency framework by requiring IPs to identify circumstances that may warrant closer scrutiny for potential misuse of the IBC process. At the same time, by clarifying that the identified indicators are neither exhaustive nor conclusive, the IBBI has maintained the distinction between circumstances warranting enquiry and a definitive finding of misuse.
By requiring further enquiry and, where reasonable grounds exist, an application before the AA, the circular reinforces the role of IPs in safeguarding the integrity of CIRP and liquidation proceedings while leaving the determination of the appropriate directions to the Adjudicating Authority.
Expositor(s): Adv. Vatsala Pandit
