The Insolvency and Bankruptcy Board of India (IBBI) has raised significant concerns regarding the misuse of the Insolvency and Bankruptcy Code (IBC), a landmark law designed for resolving financial distress. In a recent circular, the regulator emphasized the critical need for insolvency professionals (IPs) to conduct thorough due diligence to safeguard the integrity of the IBC framework.
The IBBI's directive comes amidst increasing reports from law enforcement and regulatory agencies indicating that the insolvency process is being exploited for reasons other than genuine corporate debt resolution. These illicit objectives include mitigating tax liabilities, circumventing regulatory scrutiny, avoiding investigations, and ring-fencing assets.
Professionals Key to Identifying Misuse
Given their privileged access to corporate debtor records and proceedings of the Committee of Creditors (CoC), insolvency professionals are uniquely positioned to identify potential indicators of misuse. The IBBI mandates that if an IP suspects the insolvency process has been initiated for fraudulent or malicious purposes, they must undertake a further review and, if warranted, file an application with the Adjudicating Authority detailing the facts and seeking appropriate directions.
Red Flags for IPs to Watch For:
- Minimal competitive participation in the resolution process.
- A cluster of debtors with common promoters, addresses, or directors entering the Corporate Insolvency Resolution Process (CIRP) within a short timeframe, often with overlapping CoC compositions.
- Creditor realization that is grossly disproportionate to admitted claims and lacks support from a proper valuation exercise.
Expert Welcome Vigilance Push
Industry experts have lauded the IBBI's proactive stance. Ashish Parwani, Senior Partner at Rajani Associates, highlighted the speed of the framework's introduction, reflecting the IBBI's recognition of serious concerns from law enforcement regarding attempts to exploit loopholes in the IBC. C.S. Suman Kumar Jha, Founder of Corp Legex, noted that the circular strengthens the IBC's core objective by ensuring it remains a genuine resolution mechanism, not a tool for evasion.
Jha added that by placing clear responsibility on IPs to remain vigilant and investigate red flags, the circular establishes an important early-warning system against the misuse of the IBC for non-genuine insolvency resolution.
Ongoing Challenges for IBC
Despite its success in accelerating corporate insolvency resolutions, the IBC continues to face challenges, including low recovery rates for creditors and longer-than-anticipated timelines. A report by India Ratings and Research indicated that while resolution activity is steady, creditor recoveries align with historical trends, and timelines remain elevated. During the first quarter of FY27, cases yielding resolution plans took an average of 931 days, excluding periods excluded by the adjudicating authority, with creditor realization standing at 28.6% of admitted claims. The report suggests that recovery timing remains a significant constraint on efficiency, potentially eroding underlying asset value.