IBBI wants debt resolution professionals to guard against IBC abuse

IBBI directs Insolvency Professionals to conduct due diligence and report misuse of the IBC framework following a disciplinary crackdown on non-compliant administrators

In the last two months, the disciplinary committee of the Insolvency and Bankruptcy Board of India (IBBI) either cancelled or suspended the registrations of nine insolvency professionals for violating their code of conduct and failing in oversight. 

 

On July 3, the committee disqualified an insolvency professional for orchestrating a systemic misuse of the insolvency process across 10 interconnected corporate entities.

 

Against this backdrop, the regulator’s September 9 circular urging “due diligence by Insolvency Professionals regarding misuse of IBC framework” was a long time coming.

 

Citing instances such as attempts to mitigate tax liabilities, close or merge companies without regulatory scrutiny and evade investigations, prosecution and penalties under various statutes, IBBI has placed the onus to examine potential misuse of the bankruptcy code and flag the same to tribunals, on insolvency professionals.

 

Former IBBI chairman M S Sahoo said that corporate insolvency is a costly and disruptive process in which a company undergoes a painful transition from its existing board of directors to a resolution professional and ultimately to a resolution applicant. Sahoo said that its performance and value may suffer during this transition and since the outcome is binding on all stakeholders, many, including the Government, may have to sacrifice their legitimate dues. 

 

“If the process is abused, everyone except the abuser suffers, and society at large bears the cost,” Sahoo said. 

 

Onus on IPs

 

Insolvency Professionals will become significantly more cautious in the conduct of corporate debt resolution proceedings, particularly where there are indications of a manipulated insolvency process, according to Sonam Chandwani, managing partner, KS Legal & Associates. 

 

“The regulator’s message is clear: an insolvency professional cannot remain a passive administrator where the circumstances indicate that the insolvency process is being engineered for an improper purpose,” said Chandwani.

 

Policy experts, however, have reservations about the effectiveness of IBBI’s move on two grounds. First, insolvency professionals may not have the wherewithal and the specialised training to conduct inquiries and investigations. Second, in some cases, they themselves may be involved in malpractice. 

 

Chandwani cited an example of a Delhi-based company where the insolvency professional repeatedly rejected or disqualified competing bidders on technical grounds while allowing one bidder to progress.

 

“If the IP also fails to adequately examine questionable transactions involving that bidder or connected parties, the concern shifts from misuse by the stakeholders to whether the administrator of the process has himself compromised genuine competition,” she added.

 

“Misuse of the insolvency process has been coming up more and more often in recent years, and the courts have already dealt with a fair number of cases where companies or creditors tried to bend the IBC to serve purposes it was never meant for,” said Piyush Agrawal, Partner, AQUILAW. 

 

IBC practitioners also pointed out that the Code does not contain a specific provision dealing with “misuse” of the insolvency framework. This, they said, raises questions about whether the National Company Law Tribunal may have jurisdiction in this matter. 

 

“In the absence of clear legal guidance, insolvency professionals will likely rely on the facts of each case, surrounding circumstances, established legal principles, circulars issued by regulators, and judicial interpretation to determine an intention... This may lead to uncertainty and inconsistent outcomes until a clear legal standard emerges through legislation or judicial precedent,” said company secretary Suman Kumar Jha, Founder of Corp Legex, a law firm.

 

The Code, however, does provide for reporting and recovery of 'avoidance transactions' which include ‘preferential, undervalued, fraudulent, and extortionate’ transactions. 

 

IBBI data showed that 2,132 applications have been filed with tribunals till June 30, 2026, seeking to reverse such transactions involving an amount of Rs 4.65 trillion.

 

Enforcement challenge

 

The IBBI has provided an illustrative list to the professionals to flag circumstances that warrant closer examination. 

 

These could include a cluster of corporate debtors with common promoters, addresses, directors, or inter-lending, taken into corporate debt resolution within a proximate timeframe and overlapping committees of creditors.

 

 Minimal competitive participation in the debt resolution process, or a common resolution applicant recurring across connected corporate debtors are other indicators. 

 

The regulator has cautioned that such indicators may also arise in cases involving genuine financial distress or in the ordinary course of commercial operations, and the onus, therefore, remains on the IP who has to assess the circumstances. 

 

Stressing the need for a concerted effort by the Government and the institutions responsible for the insolvency framework to prevent such abuse, Sahoo said,  “A process designed to facilitate genuine resolution must not become an instrument for private gain at the expense of stakeholders and the public interest.”

 

A March 2026 decision of the NCLAT had confirmed that initiating corporate debt resolution to evade tax liabilities is fraudulent, malicious, and impermissible, said Sukrit R. Kapoor, Partner King Stubb and Kasiva.  

 

A senior executive at a large advisory firm said resolution professionals might start charging more for their services. “Resolution professionals may increase their fees as they would have to deploy more resources, use forensics to judge or investigate intentions behind entering the insolvency resolution process.” 

  

 

                                                      Red flags for an IP

 

* Insolvency filings involving interconnected entities, overlapping lenders’ panel

 

* Common promoters/directors or related parties

* Substantial write off of loans, investment, advances

* Minimal competitive participation in the resolution process

* Realisation grossly disproportionate to admitted claims

 

                                                                                                                               Source: IBBI