IBBI Directs Insolvency Professionals to Strengthen Due Diligence Against Misuse of IBC Framework
The Insolvency and Bankruptcy Board of India (IBBI) has cautioned Insolvency Professionals (IPs) against possible misuse of the insolvency framework for purposes other than genuine insolvency resolution or liquidation of a corporate debtor. The regulator has identified six illustrative warning indicators and directed IPs to undertake further enquiry where circumstances warrant closer scrutiny.
What Has IBBI Directed Insolvency Professionals to Do?
IBBI has asked Insolvency Professionals to remain vigilant for circumstances that may indicate misuse of the CIRP or liquidation process, undertake further enquiry where warranted, and, where the IP forms a view on reasonable grounds that the process may be serving a fraudulent or malicious purpose other than the resolution of insolvency or liquidation of the Corporate Debtor, make an application before the Adjudicating Authority.
Why Has IBBI Issued This Circular?
IBBI states that it has received information from law enforcement and regulatory agencies indicating that, in certain cases, the framework under the Insolvency and Bankruptcy Code, 2016 may be used for purposes other than insolvency resolution or liquidation of the Corporate Debtor (CD).
The circular identifies examples such as attempts to mitigate tax liabilities, close or merge companies without regulatory scrutiny, mitigate investigations, prosecution or penalties under various statutes, and monetise or ring-fence assets.
Six Warning Indicators of Possible Misuse of the IBC Framework
IBBI has identified the following circumstances as indicators that Insolvency Professionals should particularly watch for during the ordinary course of CIRP or liquidation.
Single-Creditor Initiation or Recent Debt Assignment
CIRP initiated by, or debt assigned shortly before initiation to, a single creditor, other than a scheduled bank or a public financial institution as defined in Section 2(72) of the Companies Act, 2013, where that creditor subsequently dominates the Committee of Creditors (CoC).
Connected Companies Entering CIRP in Close Proximity
A cluster of Corporate Debtors having common promoters, addresses, directors or inter-lending relationships being admitted into CIRP within a proximate timeframe, particularly where the CoC composition overlaps.
Minimal Competition in the Resolution Process
Limited competitive participation in the resolution process or the repeated appearance of a common resolution applicant across connected Corporate Debtors may warrant closer examination.
Realisations Grossly Disproportionate to Admitted Claims
Realisation to creditors that is grossly disproportionate to admitted claims, where the result is not supported by a proper valuation exercise, is identified as another circumstance requiring attention.
Connection With Fraud-Related Regulatory or Investigative Proceedings
A Corporate Debtor or its group being linked to an order or ongoing proceeding of another regulator, enforcement agency or investigating agency concerning fraud may be a relevant warning sign.
Unexplained Related-Party Loans, Advances or Investments
Substantial loans, advances or investments to or from related or group entities despite an absence of operations, or transactions that have been written off or shown as doubtful/NIL without an adequate basis, may warrant further examination.
Important: An Indicator Does Not Prove Misuse
IBBI expressly clarifies that the indicators are illustrative and not exhaustive. The same circumstances may also arise in cases involving genuine financial distress or ordinary commercial operations.
Therefore, no single indicator should by itself be treated as conclusive of misuse of the insolvency process. An indicator becomes significant when a holistic and contextual assessment suggests that the CIRP or liquidation may be serving a fraudulent or malicious purpose other than resolution of insolvency or liquidation of the Corporate Debtor.
What Should an Insolvency Professional Do After Noticing a Red Flag?
On noticing one or more of the listed indicators, or other circumstances of a similar nature, the Insolvency Professional should undertake such further enquiry as may be warranted on the basis of records and information available in the ordinary course of the CIRP or liquidation process.
When Must the Insolvency Professional Approach the Adjudicating Authority?
Where, after review, the Insolvency Professional forms a view on reasonable grounds that the CIRP or liquidation may be serving a fraudulent or malicious purpose other than the resolution of insolvency or liquidation of the Corporate Debtor, the IP shall make an application before the Adjudicating Authority (AA).
Who Is Covered by the Circular?
Practical Impact for Insolvency Professionals
The circular places renewed emphasis on the IP's ability to identify unusual patterns during the ordinary course of CIRP or liquidation. The listed indicators are particularly relevant to the review of creditor composition, group-company relationships, the resolution process, valuations, regulatory proceedings and related-party financial transactions.
What the Circular Does Not Say
The circular does not state that the presence of any one listed factor automatically establishes misuse of the IBC process.
IBBI expressly recognizes that some of the listed circumstances may arise in genuine financial distress or in the ordinary course of commercial operations. The assessment must therefore be holistic and contextual.
What Should Practitioners Do Now?
The circular calls on Insolvency Professionals to remain vigilant and undertake further enquiry where warranted; it does not make the presence of a listed indicator, by itself, proof of misuse. The specific mandatory escalation step arises where, after review, the IP forms a view on reasonable grounds that the CIRP or liquidation may be serving a fraudulent or malicious purpose other than resolution of insolvency or liquidation of the Corporate Debtor. In that situation, the IP shall make an application before the Adjudicating Authority.
Frequently Asked Questions
What is the subject of IBBI Circular No. IBBI/CIRP/105/2026?
The circular addresses due diligence by Insolvency Professionals regarding possible misuse of the IBC framework for purposes other than insolvency resolution or liquidation of a Corporate Debtor.
What are the six indicators identified by IBBI?
The six indicators concern single-creditor dominance, clusters of connected Corporate Debtors, limited resolution competition, disproportionate realisations without proper valuation, fraud-related regulatory or investigative proceedings, and unexplained related/group-company loans, advances or investments.
Does one indicator automatically prove misuse of the IBC?
No. IBBI expressly states that the indicators are illustrative and that no indicator by itself should be treated as conclusive of misuse.
What should an IP do after noticing a possible red flag?
The IP should undertake further enquiry as may be warranted using records and information available in the ordinary course of the CIRP or liquidation process.
When must an IP approach the Adjudicating Authority?
Where, following review, the IP forms a view on reasonable grounds that the process may be serving a fraudulent or malicious purpose other than resolution of insolvency or liquidation of the Corporate Debtor, the IP shall make an application before the Adjudicating Authority.
What must the application to the Adjudicating Authority contain?
The application should set out the relevant facts and materials and seek appropriate directions. It should identify the indicators noticed, the material relied upon and the reasons for forming the view.
Who received the IBBI circular?
The circular is addressed to all Registered Insolvency Professionals, Insolvency Professional Entities and Insolvency Professional Agencies.
When was the circular issued?
IBBI issued Circular No. IBBI/CIRP/105/2026 on 09 September 2026.
CorpLawUpdates Analysis
The central message of the circular is not that insolvency proceedings should be viewed with suspicion. It is that Insolvency Professionals should remain alert to patterns that, taken together, may indicate that the insolvency framework is being used for a purpose other than the resolution of insolvency or liquidation of the Corporate Debtor, including a potentially fraudulent or malicious purpose.
The six indicators cover different dimensions of an insolvency case: creditor composition, group-company relationships, competitive resolution, valuation, regulatory exposure and related-party transactions. This makes the circular relevant not only to the formal insolvency record but also to the broader factual context available to the IP.
The safeguard built into the circular is equally important. IBBI does not treat the presence of an indicator as proof of wrongdoing. The required approach is a further enquiry followed by a holistic and contextual assessment. Only where the IP has reasonable grounds to form the specified view does the circular require an application before the Adjudicating Authority.
Primary Source
Authority: Insolvency and Bankruptcy Board of India (IBBI)
Circular: No. IBBI/CIRP/105/2026
Date: 09 September 2026
Subject: Due diligence by Insolvency Professionals regarding misuse of IBC framework
Legal basis: Section 196 of the Insolvency and Bankruptcy Code, 2016
Signatory: Sanjay Manocha, General Manager
The circular is addressed to Registered Insolvency Professionals, Insolvency Professional Entities and Insolvency Professional Agencies and sets out the due-diligence expectations and warning indicators discussed in this article.
