Issued by the Insolvency and Bankruptcy Board of India (IBBI) on 14th August, 2026. This is a Discussion Paper inviting public comments on a draft circular (Annexure A) on IP due diligence for fraudulent/malicious CIRP initiation. Comments must be submitted by 24th August, 2026.
Why Is IBBI Worried About Fraudulent CIRP Filings?
Not every company that walks into the Corporate Insolvency Resolution Process (CIRP) is actually insolvent — and IBBI wants Insolvency Professionals to start treating that possibility as a live compliance question, not a theoretical one. On 14th August 2026, the Board released a discussion paper flagging that CIRP is, in a number of cases flagged by law-enforcement and other regulatory agencies, being used as a workaround rather than a genuine resolution mechanism — to settle debts outside the ordinary recovery process, dodge tax and other statutory liabilities, merge or shut down companies without regulatory scrutiny, blunt the effect of pending or anticipated investigations, prosecution and penalties under other statutes, or quietly monetise or ring-fence assets.
The regulatory hook for this is Section 65 of the IBC, which already empowers the Adjudicating Authority (AA) to penalise anyone who initiates CIRP fraudulently or with malicious intent for a purpose other than genuine resolution or liquidation. The problem, as IBBI frames it, isn't a gap in the law — it's inconsistent use of the law. IPs sit closer to the corporate debtor's books, records, and Committee of Creditors (CoC) proceedings than anyone else in the process, which puts them in the best position to spot red flags early. But IBBI's experience shows these indicators aren't being consistently escalated, which has in some cases delayed Section 65 action even where the warning signs were visible.
The proposed fix is a circular — currently in draft form at Annexure A — that consolidates the IP's existing statutory duties into a single reference point and lists out, for the first time in one place, the specific red flags that should trigger a closer look. Importantly, IBBI is careful to frame this as explanatory rather than new law: nothing in the draft circular creates an obligation that doesn't already exist somewhere in the Code, the CIRP Regulations, or the IP Code of Conduct.
The Corporate Insolvency Resolution Process is the structured, time-bound legal process under the IBC where a financially distressed company is either rescued through a resolution plan or pushed into liquidation. Think of it as a hospital's emergency-care protocol for companies — but IBBI's concern here is that some "patients" aren't actually sick; they're using the emergency room to escape debt collectors, tax authorities, or investigators.
What Statutory Duties Already Require IPs to Watch for Fraud?
The draft circular doesn't invent new powers — it stitches together five existing threads of the law and argues that, read together, they already impose a "non-delegable duty" on the IP to examine fraud indicators and place them before the Adjudicating Authority.
On top of these, Clauses 1, 2, 3, 13 and 14 of the Code of Conduct for IPs (First Schedule to the IBBI (Insolvency Professionals) Regulations, 2016) require integrity, objectivity and diligence — including in representations made before the AA. IBBI's reading: put all five together, and an IP who spots red flags and stays silent isn't just missing an opportunity — they're arguably falling short of an existing duty.
Section 60(5) is the AA's general "catch-all" jurisdiction clause — it can hear virtually any dispute connected to a CIRP. Section 65 is the specific penalty provision for bad-faith filings: if someone starts a CIRP not to genuinely resolve insolvency but to achieve some other end (like dodging a tax demand), the AA can impose a penalty on them under this section. An IP invokes Section 60(5) to get the case in front of the AA, then asks for penalty action under Section 65.
What Are the 9 Red Flags IBBI Wants IPs to Watch For?
The heart of the draft circular is an illustrative — and explicitly non-exhaustive — list of nine indicators. None of these is proof of fraud on its own, but IBBI expects an IP who spots one or more to dig deeper and form a considered view.
No or negligible operations, revenue or tangible assets, with persistently negative net worth.
Large loans/advances/investments to or from group entities, written off or shown as doubtful/NIL without adequate basis.
Qualified opinions or emphasis of matter on recoverability of loans/investments, or internal-control weaknesses on related-party exposures.
The debtor or its group is linked to an order or proceeding of another regulator/enforcement agency on diversion or fraudulent disbursement of funds.
CIRP initiated by, or debt assigned shortly before initiation to, a single creditor who then dominates the CoC.
A group of debtors sharing promoters, addresses, directors or inter-lending, taken into CIRP within a proximate timeframe with overlapping CoC composition.
Valuers or auditors unable to verify asset classes for want of documents or cooperation.
Minimal competitive participation in the resolution process, or the same resolution applicant recurring across connected debtors.
Realisation to creditors grossly disproportionate to admitted claims, unsupported by a proper valuation exercise.
Read together, these nine indicators sketch a fairly specific profile: a dormant or asset-light company, tightly linked to its promoters and a single dominant creditor, that clears CIRP with little competition and an outcome that looks pre-decided. IPs handling multiple assignments for the same group or lender pair should read indicators 5, 6 and 8 particularly carefully — clustering is one of the clearest tells IBBI has flagged.
What Must an IP Do Once a Red Flag Is Spotted?
The draft circular sets out a two-step response once indicators surface — review, then escalate if warranted.
- Review in detail and form a considered opinion. Spotting an indicator isn't itself an accusation — the IP is expected to examine it against the facts of the case before drawing a conclusion.
- File before the Adjudicating Authority, if warranted. Where the IP concludes the CIRP was initiated fraudulently or maliciously for a purpose other than genuine resolution or liquidation, the IP must file an application under Section 60(5) read with Section 65 seeking directions and penalty — in addition to, not instead of, any application already warranted under Sections 43, 45, 50 or 66 for preferential, undervalued, extortionate or fraudulent transactions.
Once notified, the circular is stated to take effect immediately and to apply to all ongoing and future assignments of IPs as IRP/RP under the Code — not just fresh CIRP filings initiated after the circular's date.
An Interim Resolution Professional (IRP) is the IP first appointed when CIRP begins, running the company for the initial period. If the CoC confirms them (or appoints someone else) in their first meeting, that person becomes the Resolution Professional (RP) for the rest of the process. The draft circular's due-diligence duty applies to an IP in either role.
How Can Stakeholders Respond to the Discussion Paper?
Because this is a discussion paper — not a final circular — the priority right now is participation, not compliance. IBBI has invited comments from a wide cross-section of stakeholders, not just IPs.
- Deadline: Comments must be submitted electronically by 24th August, 2026.
- Where: IBBI website (www.ibbi.gov.in) → "Public Comments" → select this discussion paper by name.
- How: Enter your name, email ID, and stakeholder category; then write comments against the specific paragraph/clause of the draft circular you're responding to, and click "Submit."
- What's likely to draw scrutiny before finalisation: the illustrative indicator list (whether it needs safe-harbour language for genuine distress cases that happen to match one or two indicators), and the interplay between this due-diligence duty and an IP's existing disclosure obligations under Sections 43, 45, 50 and 66.
- What IPs should start doing now, in anticipation: review current and recent assignments against the nine indicators, ensure CIRP working papers document the basis for related-party write-offs and valuation conclusions, and flag internally any assignment where a single creditor or a small cluster of connected debtors is involved.
Frequently Asked Questions
What does IBBI's new discussion paper on fraudulent CIRP initiation propose?
IBBI's discussion paper dated 14 August 2026 proposes a circular directing Insolvency Professionals to actively examine every CIRP for indicators of fraudulent or malicious initiation and, where such indicators are found, file an application under Section 60(5) read with Section 65 of the IBC before the Adjudicating Authority.
Who does the draft circular apply to?
The draft circular is addressed to all Registered Insolvency Professionals, Insolvency Professional Entities, and Insolvency Professional Agencies, and will apply to all ongoing and future CIRP assignments once issued.
Is the circular already in force?
No. It is currently a draft annexed to a discussion paper; IBBI is inviting public comments until 24 August 2026 before deciding whether and how to finalize it.
What are the indicators of fraudulent or malicious CIRP initiation listed by IBBI?
IBBI lists 9 illustrative, non-exhaustive indicators, including corporate debtors with negligible operations and negative net worth, single-creditor-dominated Committees of Creditors, clusters of connected debtors admitted together, and creditor realisations grossly disproportionate to admitted claims.
What happens if an IP identifies these indicators but does not report them?
The draft circular frames this as a breach of the IP's existing non-delegable statutory duty under provisions including Sections 18, 19(2), 25(2)(j), 60(5) and 65 of the IBC and Clauses 1, 2, 3, 13 and 14 of the IP Code of Conduct, exposing the IP to regulatory and disciplinary consequences.
Does this create a new legal obligation for Insolvency Professionals?
No. IBBI states the draft circular is explanatory in nature and consolidates duties that already flow from existing provisions of the Code and Regulations; it does not create any new substantive obligation.
How can stakeholders submit comments on the draft circular?
Comments can be submitted electronically on the IBBI website under 'Public Comments' by selecting the relevant discussion paper, entering name, email and stakeholder category, and writing remarks against specific paragraphs of the draft circular, by 24 August 2026.
What action must an IP take if fraudulent or malicious initiation is suspected?
The IP must review the indicators in detail, form a considered opinion, and if satisfied that the CIRP was initiated fraudulently or maliciously, file an application before the Adjudicating Authority under Section 60(5) read with Section 65, in addition to any application warranted under Sections 43, 45, 50 or 66.
CorpLawUpdates Analysis
The most consequential thing about this discussion paper isn't any single new rule — it's the shift from a general "IPs should be diligent" expectation to a named checklist of nine specific fact patterns. That distinction matters enormously in a disciplinary or regulatory context. Once IBBI has published a list like this, an IP who later faces scrutiny over a CIRP that matches three or four of these indicators will have a much harder time arguing they simply didn't notice. In effect, IBBI is converting an implicit standard of care into an explicit, citable one — without technically changing what the law already required.
The practical compliance challenge sits with documentation, not detection. Most experienced IPs will already instinctively pause at a debtor with no operations and a dominant single creditor. What's harder is building a consistent, defensible paper trail showing that the indicator was noticed, investigated, and either escalated or reasonably explained away. IPs and IPEs would do well to start building a structured due-diligence memo template now — mapping each of the nine indicators against the facts of every live assignment — rather than waiting for the circular to be finalised.
There's also a quieter tension buried in this paper that commenters should flag: several of the nine indicators (thin operations, related-party dependence, a dominant lender) are also common features of genuinely distressed MSMEs and group companies going through legitimate restructuring, not just fraudulent filings. Without some safe-harbour language distinguishing "matches an indicator" from "IP must escalate to Section 65," there's a real risk of IPs over-referring borderline cases defensively, adding friction and cost to legitimate CIRPs. This is likely to be one of the more substantive points raised during the comment window.
Looking ahead, this paper fits a broader pattern of IBBI tightening the "gatekeeper" role of IPs across multiple fronts — valuation scrutiny, related-party transaction reporting, and now fraud detection at the point of admission itself. Practitioners should expect the finalised circular, once issued, to be followed reasonably quickly by clarificatory FAQs or a template due-diligence format, given how operationally specific the indicator list already is. IPAs would also be well placed to build this checklist into their monitoring and CPE frameworks ahead of the circular's formal notification.
This article is for informational and educational purposes only and does not constitute legal or regulatory advice. Verify with primary regulatory sources before acting.
