4 min readNew DelhiUpdated: Sep 11, 2026 04:25 AM IST
The Insolvency and Bankruptcy Board of India (IBBI) on Wednesday issued a circular asking insolvency professionals to stay vigilant to signs that the bankruptcy law is being misused for purposes other than resolution or liquidation of the companies under financial stress.
The IBBI said that it has received information from law enforcement and regulatory agencies that the Insolvency and Bankruptcy Code, 2016 is also being used to dodge taxes, escape investigations, closure or merger of companies without regulatory scrutiny, or monetising and ring-fencing assets.
The board listed six indicators to be alert for: very low recoveries for creditors without proper valuation, a single non-bank creditor dominating the committee of creditors (CoC), a cluster of related companies with common promoters, addresses, directors, or inter-lending taken into bankruptcy process; a common resolution applicant recurring across connected corporate debtors, linkage of corporate debtor or its group to fraud probes by another regulator, and suspicious loans between group companies.
The circular has come on the heels of a National Company Law Tribunal (NCLT) order on August 25 involving Essel Group founder Subhash Chandra, which approved a repayment plan providing for just Rs 6.25 crore to the creditors against their admitted claims of Rs 22,006.57 crore. Later, a five-member special bench of NCLT stayed the August 25 order, which was passed by a single-member bench of the tribunal.
In this case, the five entities — Veena Investments, Direct Media Distribution Ventures, World Crest Advisors, Lemonade Capital Advisors, and Corpcall Capital Advisors — collectively held nearly 62% of the total voting share and pushed the repayment plan, while banks like LIC Housing, HDFC, RBL, Axis, and Canara Bank voted against it. The public banks alleged that the non-bank entities were associates or related parties of debtors and acted under Chandra’s influence.
However, the IBBI also said that some of these indicators may arise in cases involving genuine financial distress. “They are intended to flag circumstances that warrant closer examination, and no indicator, by itself, should be treated as conclusive of misuse of the insolvency process,” said the bankruptcy law regulator.
“This is a timely order by IBBI when many bankruptcy cases are resulting in very lower recovery in NCLT. It casts an obligation on resolution professionals to look at the lapses during the process itself and inform the tribunal in advance. This will create checks and balances. Not only the corporate debtor, but the resolution professionals will also be under scrutiny,” said Prateek Kumar, partner at Khaitan & Co.
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Time-bound mechanism, the issue of “haircuts”
The board further said that if the insolvency professional (IP), who conducts the corporate insolvency resolution process (CIRP), forms a view that the process may be serving a fraudulent or malicious purpose other than the resolution of insolvency or liquidation of the corporate debtor, then the person shall file an application before the NCLT with fact for the appropriate direction under the code.
“The application should identify the indicators noticed, the material relied upon by the IP, and the reasons for forming such a view,” said the IBBI.
The IBC created a time-bound mechanism to deal with companies that fail to repay their loans — by either reviving such firms through a resolution process or liquidating them if resolution is not possible. If a company fails to pay its debt, its creditor then can approach the NCLT to initiate the “insolvency process” under the law
However, the August 25 order of NCLT yet again raised the question of “haircuts”, a highly debated issue under the IBC framework.
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According to data available with the Ministry of Corporate Affairs, between the financial years FY22 and FY26, a total of 1,077 cases were resolved under the IBC, with creditors recovering Rs 2.47 lakh crore. The average recovery was close to 29%. In FY26, the recovery against the admitted claims was 20%, the lowest in last five years.
This means that a bank may have claims running into thousands of crores rupees, but what they receive after the resolution process could be a small part of what it is owed. Now, the IBBI circular says that resolution professionals should be alert in cases where realisation to creditors is grossly disproportionate to admitted claims.
