IBBI Proposes Tighter Checks for Insolvency Professionals to Curb Misuse of IBC Framework
The Insolvency and Bankruptcy Board of India (IBBI) has proposed tighter checks by insolvency professionals (IPs) to prevent misuse of the corporate insolvency resolution process (CIRP), after receiving inputs from law-enforcement and regulatory agencies about cases where the insolvency framework might have been used for purposes unrelated to resolution.
The board said CIRP was being misused in a few cases to settle debts, mitigate tax liabilities, close or merge companies without regulatory scrutiny, mitigate investigations, prosecution and penalties. It also flagged the use of insolvency proceedings to monetise or ring-fence assets.
In its draft circular, IBBI said that IPs, due to their access to the books, records and committee of creditors (CoC) proceedings, have a duty to identify signs of misuse and bring them to the adjudicating authority’s notice.
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The proposed guidance has listed warning signs that IPs should examine. These include companies with negligible operations, revenue or tangible assets and persistently negative net worth as well as substantial loans, advances or investments involving related or group entities.
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IBBI has asked IPs to look for qualified audit reports on loans and investments, weaknesses in controls over related-party transactions, and links to regulatory or enforcement cases involving diversion or fraudulent use of funds.
Another concern raised by the board is lender concentration around the initiation of CIRP. The draft identifies cases where debt is assigned shortly before the insolvency proceedings to a single creditor that subsequently dominates the CoC.
IBBI has also highlighted common signs of misuse, including groups of connected companies entering CIRP around the same time, common promoters or directors, overlapping CoCs, difficulties in verifying assets, and limited competition among bidders.
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The board said IPs should review such indicators in detail and form a considered opinion. The proposed circular is intended to clarify existing duties and ensure consistency in identifying potential abuse.
The regulator has invited comments from stakeholders by August 24.
“Where the IP is of the opinion that the insolvency process was initiated fraudulently or with malicious intent for a purpose other than resolution or liquidation, the IP shall file an application before the adjudicating authority under Section 60(5) read with Section 65 of the IBC for suitable directions and penalty, in addition to any application warranted under Sections 43, 45, 50 or 66,” as per draft.
The regulator has further clarified that the draft is explanatory in nature and does not create any new obligations for IPs.
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This article was first uploaded on August sixteen, twenty twenty-six, at fourteen minutes past six in the evening.
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