MCA to examine litigation funding for PUFE transactions under insolvency

The MCA will study third-party litigation funding for PUFE transactions as funds worth over Rs 4.38 lakh crore remain locked in avoidance proceedings under the insolvency regime.

The Ministry of Corporate Affairs (MCA) will examine litigation funding for preferential, undervalued, fraudulent, and extortionate (PUFE) transactions under the insolvency regime to improve recoveries, the ministry told a parliamentary standing committee in a written reply. 

 

“Litigation funding for PUFE transactions will be examined in light of global best practices and refined through detailed consultation with all relevant stakeholders,” the MCA said. 

 

The ministry in its comments highlighted that the market for litigation funding remains nascent in India. 

 

Funds worth over ₹4.38 trillion across 1,878 applications are locked in avoidance proceedings until March 31, 2026, according to Insolvency and Bankruptcy Board of India (IBBI) data.  Till June 2025, only 379 cases involving ₹66,919 crore had been disposed of, and ₹7,931 crore had been ordered to be clawed back. 

  Litigation funding, or third-party litigation finance, is an arrangement where an outside investor pays a claimant’s legal costs. In return, the funder gets an agreed-upon share of the financial recovery if the case wins.

 

Insolvency law practitioners said PUFE claims are often not pursued due to funding constraints, and litigation funding could make this process effective. 

 

“Third-party funding, if allowed in PUFE claims, could easily cover legal, investigation, and expert costs, with returns tied to success. This would ease the burden on creditors and shall support recovery from promoters or related parties who diverted the funds of the corporate debtor,” said Daizy Chawla, senior partner, S&A Law Offices. 

 

The house panel in its report on action taken by the MCA noted that avoidance transactions directly erode the value available to creditors and corporate debtors undertake such transactions before the commencement of insolvency proceedings that unfairly favour certain creditors or divert the company’s assets, thereby reducing the value available for resolution.

 

The Insolvency Amendment Act, 2026, has expanded the look-back period for avoidance transactions, which are now counted from the initiation date (date of filing of application) rather than the insolvency commencement date. This was done to capture transactions undertaken in the interim period before admission, which may have been used to siphon value. The Act also clarified that proceedings relating to avoidance transactions will continue even after the completion of resolution proceedings or liquidation. 

 

Making a case for third-party litigation funding, the panel said it can enable pursuing complex and high-value claims such as tracing diverted assets, undertaking forensic investigations, and initiating recovery actions without imposing additional financial burden on the already depleted insolvency estate.

 

“Such a framework should incorporate appropriate safeguards, including mandatory disclosure of funding arrangements before the adjudicating authority and the Committee of Creditors, prohibition of funder control over litigation strategy, transparent and reasonable return structures, and regulatory oversight by the IBBI,” the committee recommended. 

 

The Ministry of Corporate Affairs (MCA) will examine litigation funding for preferential, undervalued, fraudulent, and extortionate (PUFE) transactions under the insolvency regime to improve recoveries, the ministry told a parliamentary standing committee in a written reply. 

 

 

“Litigation funding for PUFE transactions will be examined in light of global best practices and refined through detailed consultation with all relevant stakeholders,” the MCA said. 

 

The ministry in its comments highlighted that the market for litigation funding remains nascent in India. 

 

Funds worth over ₹4.38 trillion across 1,878 applications are locked in avoidance proceedings until March 31, 2026, according to Insolvency and Bankruptcy Board of India (IBBI) data.  Till June 2025, only 379 cases involving ₹66,919 crore had been disposed of, and ₹7,931 crore had been ordered to be clawed back. 

 

Litigation funding, or third-party litigation finance, is an arrangement where an outside investor pays a claimant’s legal costs. In return, the funder gets an agreed-upon share of the financial recovery if the case wins.

 

Insolvency law practitioners said PUFE claims are often not pursued due to funding constraints, and litigation funding could make this process effective. 

 

“Third-party funding, if allowed in PUFE claims, could easily cover legal, investigation, and expert costs, with returns tied to success. This would ease the burden on creditors and shall support recovery from promoters or related parties who diverted the funds of the corporate debtor,” said Daizy Chawla, senior partner, S&A Law Offices. 

 

The house panel in its report on action taken by the MCA noted that avoidance transactions directly erode the value available to creditors and corporate debtors undertake such transactions before the commencement of insolvency proceedings that unfairly favour certain creditors or divert the company’s assets, thereby reducing the value available for resolution.

 

The Insolvency Amendment Act, 2026, has expanded the look-back period for avoidance transactions, which are now counted from the initiation date (date of filing of application) rather than the insolvency commencement date. This was done to capture transactions undertaken in the interim period before admission, which may have been used to siphon value. The Act also clarified that proceedings relating to avoidance transactions will continue even after the completion of resolution proceedings or liquidation. 

 

Making a case for third-party litigation funding, the panel said it can enable pursuing complex and high-value claims such as tracing diverted assets, undertaking forensic investigations, and initiating recovery actions without imposing additional financial burden on the already depleted insolvency estate.

 

“Such a framework should incorporate appropriate safeguards, including mandatory disclosure of funding arrangements before the adjudicating authority and the Committee of Creditors, prohibition of funder control over litigation strategy, transparent and reasonable return structures, and regulatory oversight by the IBBI,” the committee recommended.