Insolvency regulator sounds alarm over misuse of bankruptcy law; tells professionals to dig deeper
IBBI circular flags attempts to use insolvency proceedings to sidestep tax liabilities, investigations and regulatory scrutiny.
- Sep 10, 2026,
- Updated Sep 10, 2026 3:28 PM IST
Amid growing concerns over the misuse of the Insolvency and Bankruptcy Code (IBC) for purposes beyond resolving financial distress, the Insolvency and Bankruptcy Board of India (IBBI) has asked insolvency professionals to exercise greater vigilance.
The move comes against instances where the insolvency process has allegedly been used to manage tax liabilities, sidestep regulatory scrutiny, or limit the impact of investigations and penalties.
In a new circular, the IBBI has underlined the need for insolvency professionals to carry out due diligence to guard against misuse of the IBC framework.
“The IBBI has received information from law enforcement and regulatory agencies that, in certain cases, the framework under the Insolvency and Bankruptcy Code, 2016 is being misused for purposes other than insolvency resolution or liquidation of the corporate debtor (CD),” it said in a recent circular.
Such instances include, inter alia, mitigating tax liabilities; closing or merging companies without regulatory scrutiny; mitigating investigations, prosecution and penalties under various statutes; and monetising and ring-fencing assets, it said.
Given their access to the books and records of corporate debtors and to the proceedings of the committee of creditors (CoC), IPs are well placed to identify such indicators in the ordinary course of the insolvency process, the IBBI said. In case of any such doubts, the IP must undertake a further review and, if the insolvency has been initiated for a fraudulent or malicious purpose, file an application before the Adjudicating Authority, setting out the relevant facts and materials and seeking further directions.
Potential indicators in such cases could include minimal competitive participation in the resolution process; a cluster of debtors with common promoters, addresses, directors or inter-lending arrangements entering CIRP within a proximate timeframe and with overlapping Committee of Creditors composition; or creditor realisation that is grossly disproportionate to admitted claims and unsupported by a proper valuation exercise.
Experts welcomed the move, saying it will help protect the integrity of the process. “The speed with which the framework has been introduced is noteworthy and appears to reflect the IBBI’s recognition of the serious concerns raised by law-enforcement and regulatory agencies regarding possible misuse of the CIRP, and of various instances where stakeholders have sought to exploit lacunae in the IBC framework and misuse the intent of the IBC framework,” said Ashish Parwani, Senior Partner at Rajani Associates.
C.S. Suman Kumar Jha, Founder of Corp Legex, also noted that the circular strengthens the IBC’s core objective by ensuring that CIRP remains a genuine resolution mechanism, and not a route to misuse. “By placing a clear responsibility on IPs to remain vigilant and undertake further enquiry where specific red flags are noticed, the circular creates an important early-warning mechanism against the misuse of the IBC for purposes other than genuine insolvency resolution,” he said.
While the IBC remains a landmark reform that has helped ensure faster resolution of corporate insolvency cases, concerns persist over low recoveries and longer-than-anticipated timelines.
A new report by India Ratings and Research highlighted that while resolution activity under the IBC remains steady, creditor recoveries are broadly in line with historical trends and timelines remain elevated. Cases yielding resolution plans during the first quarter of FY27 took an average of 931 days, excluding periods excluded by the adjudicating authority, while creditor realisation stood at 28.6% of admitted claims.
“Ind-Ra believes recovery timing remains a key constraint on recovery efficiency, particularly for stressed-asset portfolios where delayed resolutions can defer cash flows and erode underlying value,” it said.
Amid growing concerns over the misuse of the Insolvency and Bankruptcy Code (IBC) for purposes beyond resolving financial distress, the Insolvency and Bankruptcy Board of India (IBBI) has asked insolvency professionals to exercise greater vigilance.
The move comes against instances where the insolvency process has allegedly been used to manage tax liabilities, sidestep regulatory scrutiny, or limit the impact of investigations and penalties.
In a new circular, the IBBI has underlined the need for insolvency professionals to carry out due diligence to guard against misuse of the IBC framework.
“The IBBI has received information from law enforcement and regulatory agencies that, in certain cases, the framework under the Insolvency and Bankruptcy Code, 2016 is being misused for purposes other than insolvency resolution or liquidation of the corporate debtor (CD),” it said in a recent circular.
Such instances include, inter alia, mitigating tax liabilities; closing or merging companies without regulatory scrutiny; mitigating investigations, prosecution and penalties under various statutes; and monetising and ring-fencing assets, it said.
Given their access to the books and records of corporate debtors and to the proceedings of the committee of creditors (CoC), IPs are well placed to identify such indicators in the ordinary course of the insolvency process, the IBBI said. In case of any such doubts, the IP must undertake a further review and, if the insolvency has been initiated for a fraudulent or malicious purpose, file an application before the Adjudicating Authority, setting out the relevant facts and materials and seeking further directions.
Potential indicators in such cases could include minimal competitive participation in the resolution process; a cluster of debtors with common promoters, addresses, directors or inter-lending arrangements entering CIRP within a proximate timeframe and with overlapping Committee of Creditors composition; or creditor realisation that is grossly disproportionate to admitted claims and unsupported by a proper valuation exercise.
Experts welcomed the move, saying it will help protect the integrity of the process. “The speed with which the framework has been introduced is noteworthy and appears to reflect the IBBI’s recognition of the serious concerns raised by law-enforcement and regulatory agencies regarding possible misuse of the CIRP, and of various instances where stakeholders have sought to exploit lacunae in the IBC framework and misuse the intent of the IBC framework,” said Ashish Parwani, Senior Partner at Rajani Associates.
C.S. Suman Kumar Jha, Founder of Corp Legex, also noted that the circular strengthens the IBC’s core objective by ensuring that CIRP remains a genuine resolution mechanism, and not a route to misuse. “By placing a clear responsibility on IPs to remain vigilant and undertake further enquiry where specific red flags are noticed, the circular creates an important early-warning mechanism against the misuse of the IBC for purposes other than genuine insolvency resolution,” he said.
While the IBC remains a landmark reform that has helped ensure faster resolution of corporate insolvency cases, concerns persist over low recoveries and longer-than-anticipated timelines.
A new report by India Ratings and Research highlighted that while resolution activity under the IBC remains steady, creditor recoveries are broadly in line with historical trends and timelines remain elevated. Cases yielding resolution plans during the first quarter of FY27 took an average of 931 days, excluding periods excluded by the adjudicating authority, while creditor realisation stood at 28.6% of admitted claims.
“Ind-Ra believes recovery timing remains a key constraint on recovery efficiency, particularly for stressed-asset portfolios where delayed resolutions can defer cash flows and erode underlying value,” it said.