The Insolvency and Bankruptcy Board of India (IBBI) has directed insolvency professionals (IPs) to remain vigilant and conduct due diligence where circumstances indicate potential misuse of the insolvency process for purposes other than resolution of insolvency or liquidation of a corporate debtor.
In a circular dated September 9, 2026, the regulator said it had received information from law enforcement and regulatory agencies regarding instances where the Insolvency and Bankruptcy Code, 2016 (IBC) was allegedly being used for purposes other than insolvency resolution or liquidation.
According to the IBBI, such instances include attempts to mitigate tax liabilities, close or merge companies without regulatory scrutiny, mitigate investigations, prosecutions and penalties under various statutes, and monetise or ring-fence assets.
The circular, issued to all registered insolvency professionals, insolvency professional entities and insolvency professional agencies, sets out a list of indicators that IPs should particularly watch for during the corporate insolvency resolution process (CIRP).
The IBBI has identified as a potential red flag cases where CIRP 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).
Another indicator is a cluster of corporate debtors 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 CoCs.
The regulator has also flagged minimal competitive participation in the resolution process, as well as situations where the same resolution applicant repeatedly participates across connected corporate debtors.
Further, IPs have been asked to scrutinise instances where the realisation to creditors is grossly disproportionate to admitted claims and is not supported by a proper valuation exercise.
A further indicator is where the corporate debtor or its group is linked to an order or an ongoing proceeding by another regulator, enforcement or investigating agency concerning fraud.
The IBBI has also identified substantial loans, advances or investments involving related or group entities despite an absence of operations, particularly where such amounts have been written off or classified as doubtful/NIL without an adequate basis.
The regulator, however, clarified that the listed indicators are illustrative and not exhaustive. It said some of these circumstances may also occur in cases involving genuine financial distress or in the ordinary course of commercial operations.
“No indicator, by itself, should be treated as conclusive of misuse of the insolvency process,” the IBBI said.
Where one or more indicators are noticed, IPs are required to undertake further enquiry as warranted based on the records and information available during the ordinary course of the CIRP or liquidation process.
The IBBI said an indicator assumes significance when, following a “holistic and contextual assessment”, it suggests that the insolvency process may be serving a fraudulent or malicious purpose other than resolution of insolvency or liquidation of the corporate debtor.
Where an IP forms a view, on reasonable grounds, that the process may be serving such a fraudulent or malicious purpose, the IP is required to approach the adjudicating authority.
The application should set out the relevant facts and materials and seek directions that the adjudicating authority may consider appropriate under the IBC. The IP must identify the indicators noticed, the material relied upon and the reasons for forming such a view.
The IBBI’s latest direction comes against the backdrop of growing regulatory scrutiny of potential misuse of the insolvency framework.
The regulator noted that IPs, by virtue of their access to the corporate debtor’s books and records and proceedings of the CoC, are well placed to identify such indicators in the ordinary course of the insolvency process.
