Misuse of IBC Proceedings: New IBBI Due-Diligence Requirements Explained

Misuse of IBC Proceedings: New IBBI Due-Diligence Requirements Explained

Introduction

The Insolvency and Bankruptcy Code, 2016 was designed to resolve genuine financial distress.

It was not intended to become a mechanism for:

avoiding taxes;
frustrating regulatory proceedings;
escaping investigations or penalties;
transferring assets to connected persons;
engineering artificial insolvency;
suppressing genuine competition;
or using the insolvency process to ring-fence assets from enforcement.

Concerns about such misuse have grown steadily.

On 9 September 2026, the Insolvency and Bankruptcy Board of India issued Circular No. IBBI/CIRP/105/2026, titled:

“Due diligence by Insolvency Professionals regarding misuse of IBC framework.”

IBBI stated that it had received information from law-enforcement and regulatory agencies indicating that, in certain cases, the IBC framework was being used for purposes other than genuine insolvency resolution or liquidation.

The Board specifically referred to suspected attempts involving:

mitigation of tax liabilities;
closure or merger of companies without appropriate regulatory scrutiny;
mitigation of investigations;
avoidance of prosecution and penalties;
monetisation of assets;
and ring-fencing of assets.

The circular does not declare every unusual insolvency transaction fraudulent.

Instead, it creates a structured red-flag and enquiry framework for Insolvency Professionals.

Where an Insolvency Professional identifies suspicious indicators and, after further examination, forms a reasonable view that the insolvency process may be serving a fraudulent or malicious purpose, the professional is now expected to place those facts before the Adjudicating Authority.

This represents an important shift in the role of Insolvency Professionals.

An RP or liquidator is no longer expected merely to administer the mechanical steps of the process.

The professional must also remain alert to whether the IBC itself is being used as an instrument of abuse.

What Has IBBI Changed in September 2026?

IBBI’s circular directs Insolvency Professionals to remain vigilant for circumstances suggesting misuse of:

Corporate Insolvency Resolution Process;
or liquidation proceedings.

IBBI considers IPs particularly well placed to detect such activity because they have access to:

books and records of the corporate debtor;
financial transactions;
related-party dealings;
creditor claims;
Committee of Creditors proceedings;
valuation material;
resolution applications;
and other internal information that may not have been available when insolvency was first initiated.

The circular establishes three broad steps:

Identify suspicious indicators.
Conduct further enquiry using available records and information.
Approach the Adjudicating Authority where reasonable grounds indicate fraudulent or malicious use of the IBC.

It is therefore best understood as a regulatory due-diligence obligation on IPs, rather than merely another reporting form.

Why Did IBBI Issue the Circular?

IBBI expressly states that information had been received from:

law-enforcement agencies; and
regulatory agencies

regarding possible misuse of the insolvency framework.

The concern is that an apparently lawful CIRP can sometimes be structured to achieve an objective fundamentally different from resolving insolvency.

For example:

A promoter-controlled company may deliberately allow a connected creditor to trigger CIRP.

That creditor may then dominate the Committee of Creditors.

There may be almost no genuine competition for the corporate debtor.

A connected resolution applicant may eventually acquire the business or assets at a very low valuation.

Meanwhile, tax proceedings, enforcement action or other regulatory problems may be affected by the insolvency outcome.

Not every such pattern is necessarily fraudulent.

But IBBI now requires professionals to look beyond procedural compliance and ask:

What is this insolvency process actually achieving?

The Legal Foundation: Section 65 IBC

The Code already contained a direct anti-abuse provision.

Section 65 deals with fraudulent or malicious initiation of proceedings.

Under Section 65(1), where a person initiates insolvency resolution or liquidation:

fraudulently; or
with malicious intent;
for a purpose other than genuine insolvency resolution or liquidation,

the Adjudicating Authority may impose a penalty.

The statutory penalty ranges from:

₹1 lakh to ₹1 crore.

Section 65 therefore makes an important distinction.

IBC proceedings are not abusive merely because:

the applicant is aggressive;
the corporate debtor dislikes the proceeding;
the eventual haircut is high;
or the process produces an unfavourable commercial result.

There must be a fraudulent or malicious purpose of the kind contemplated by the Code.

The New Circular Does Not Replace Section 65

The September 2026 circular should not be described as creating the concept of fraudulent insolvency for the first time.

Section 65 already existed.

What the circular does is strengthen the detection mechanism.

Earlier, a corporate debtor or stakeholder might raise Section 65 before NCLT.

Now the Insolvency Professional administering the process is specifically instructed to watch for red flags, investigate them within the information available during the process, and approach the Adjudicating Authority where the evidence justifies concern.

This is a major compliance development.

First Red Flag: CIRP Triggered by a Single Dominant Creditor

IBBI’s first identified indicator is particularly significant.

IPs should examine situations where:

CIRP is initiated by a single creditor; or
debt is assigned shortly before commencement of CIRP to a single creditor;

and that creditor subsequently dominates the Committee of Creditors.

IBBI expressly excludes scheduled banks and public financial institutions from this particular indicator.

Why Is Recent Debt Assignment Suspicious?

Debt assignment is legitimate.

Creditors routinely sell or transfer debt.

But imagine the following sequence:

Company A faces regulatory action.
A small debt is transferred to Entity X.
Entity X is connected directly or indirectly to the promoter.
X immediately initiates CIRP.
X becomes the dominant voting creditor.
The process eventually produces a restructuring favourable to connected persons.

That pattern deserves closer scrutiny.

The issue is not the assignment alone.

It is the:

timing;
relationship between parties;
CoC control;
commercial rationale;
and ultimate purpose.

Related-Party Status Is Not the Only Question

Parties attempting to manipulate insolvency structures may not always appear as formally declared related parties.

Therefore, due diligence may have to look beyond corporate labels.

Relevant questions can include:

Who funded the creditor?
Who ultimately owns it?
When was the debt acquired?
Was the debt actually recoverable?
Was consideration genuinely paid?
Do the parties share directors or addresses?
Were there prior transactions between them?
Is there common management influence?

The economic relationship may be more important than the superficial corporate structure.

Second Red Flag: Multiple Connected Companies Enter CIRP Together

IBBI also identifies clusters of corporate debtors entering CIRP within a proximate period where they share features such as:

common promoters;
common directors;
common addresses;
inter-company lending;
or overlapping Committee of Creditors composition.

Again, group insolvencies are not automatically suspicious.

A corporate group can genuinely collapse together.

For example, if one major infrastructure group fails, several subsidiaries may become insolvent because they depend on the same funding structure.

But where numerous connected companies enter insolvency in a coordinated pattern, an IP is now expected to ask whether the process reflects:

genuine group distress

planned insolvency engineering.

Example: Coordinated Group Insolvency

Suppose five companies have:

the same promoters;
the same registered address;
substantial inter-company loans;
overlapping creditors;
and common directors.

All five enter CIRP within four months.

The same creditor dominates several CoCs.

The same bidder appears repeatedly.

Assets are eventually acquired by connected entities.

Under the new IBBI approach, these circumstances should not be viewed in isolation.

The IP should examine the pattern holistically.

Third Red Flag: Minimal Competition

IBBI specifically asks IPs to watch for:

minimal competitive participation in the resolution process; or
the same resolution applicant repeatedly appearing across connected corporate debtors.

This is important because genuine price discovery is central to maximising value under the IBC.

A resolution process where:

only one serious bidder appears;
competing bidders inexplicably withdraw;
eligibility conditions effectively exclude competitors;
or the same bidder continuously acquires related companies

may require deeper examination.

Does One Bidder Mean Fraud?

No.

IBBI expressly says that its indicators are:

illustrative and not exhaustive.

It also states that an indicator may arise in a genuine insolvency case and should not be treated as conclusive by itself.

A distressed company may genuinely attract only one bidder.

For example:

the sector may be declining;
assets may be specialised;
environmental liabilities may be large;
litigation may deter investors;
or the business may simply have little market value.

Therefore:

red flag does not equal finding of fraud.

It triggers inquiry.

Fourth Red Flag: Extremely Low Creditor Recovery Without Proper Valuation

Another important indicator arises where creditor realisation is:

grossly disproportionate to admitted claims

and there is no adequate supporting valuation exercise.

This must be handled carefully.

A large haircut is not automatically evidence of wrongdoing.

Haircut Alone Does Not Prove IBC Misuse

Suppose creditors have admitted claims of ₹1,000 crore.

The corporate debtor has usable assets worth only ₹100 crore.

A ₹100 crore resolution does not automatically mean 90% of value has disappeared through fraud.

Claims and enterprise value are different concepts.

IBC recoveries depend on the economic value remaining in the business.

The suspicious situation is instead where:

recoveries appear inexplicably low;
valuation methodology is weak;
significant assets appear omitted;
bids fall dramatically below defensible valuations;
or connected parties acquire valuable assets at unsupported prices.

The circular therefore links disproportionate realisation to the absence of a proper valuation exercise, rather than treating haircut percentages alone as proof of wrongdoing.

IBBI Also Strengthened Valuation in 2026

The misuse circular sits within a broader regulatory push.

IBBI issued Guidelines for Conducting Valuation under the IBC on 15 June 2026, and the Board’s legal-framework records show several valuation and CIRP reforms during 2026.

That broader context matters.

Manipulation of valuation can potentially influence:

liquidation value;
fair value;
bidding strategy;
CoC decisions;
haircut perception;
and ultimate asset acquisition.

Stronger valuation controls therefore complement the September anti-misuse circular.

Fifth Red Flag: Existing Fraud Investigation or Regulatory Action

IBBI directs IPs to pay special attention where the corporate debtor or its group is connected to:

an order;
investigation;
or ongoing proceeding

before another:

regulator;
enforcement agency;
or investigating authority

concerning fraud.

This is perhaps the most consequential indicator.

IBC Cannot Become an Escape Route From Other Laws

Suppose a company is facing:

tax investigation;
securities enforcement;
money-laundering investigation;
corporate fraud proceedings;
or other statutory penalties.

It then enters insolvency.

The insolvency itself may be completely genuine.

But the IP must now assess whether circumstances indicate that CIRP is being deliberately used to:

frustrate investigation;
extinguish liabilities improperly;
transfer assets away;
reduce regulatory exposure;
or sanitise ownership.

IBBI specifically mentioned misuse aimed at mitigating:

investigations;
prosecutions;
and penalties.

Resolution Does Not Automatically Erase Every Liability

The IBC contains powerful provisions concerning resolution plans and the treatment of claims.

But insolvency law does not give parties an unrestricted licence to engineer proceedings merely to escape wrongdoing.

Courts have consistently treated the Code as a mechanism for insolvency resolution rather than a forum for collateral commercial objectives.

The September circular reinforces this distinction from a regulatory perspective.

Sixth Red Flag: Suspicious Related-Party Loans and Investments

IBBI’s final specified indicator concerns substantial:

loans;
advances;
or investments

to or from related/group entities where:

there are little or no real operations;
amounts have been written off;
amounts are shown as doubtful;
balances are reduced to nil;
or there is no adequate commercial explanation.

These transactions can be particularly important when investigating whether value was extracted before CIRP.

Example: ₹200 Crore Group Loan Written Off

Suppose a corporate debtor advanced ₹200 crore to a promoter-controlled company.

There appears to be:

no proper agreement;
no security;
no repayment schedule;
no meaningful business rationale.

The recipient conducts little genuine business.

Immediately before CIRP, the amount is written off as doubtful.

That does not automatically prove fraud.

But it plainly requires investigation.

The IP may need to examine whether the transaction represents:

genuine commercial lending;
diversion of assets;
preferential dealing;
fraudulent transaction;
undervalued transaction;
or another avoidance issue.

Avoidance Transactions Remain a Separate IBC Framework

The new due-diligence circular should not be confused with existing avoidance-transaction provisions.

The Code already contains mechanisms dealing with matters such as:

preferential transactions;
undervalued transactions;
extortionate credit transactions;
fraudulent trading;
and wrongful trading.

An abusive insolvency structure may therefore generate several separate legal questions.

For example:

Question 1: Was the CIRP itself initiated maliciously?

That raises Section 65.

Question 2: Were assets previously transferred improperly?

That may engage avoidance provisions.

Question 3: Did directors conduct business fraudulently?

Separate provisions may apply.

Question 4: Is the resolution applicant legally ineligible?

Section 29A may arise.

These issues should not be collapsed into one another.

Section 29A Due Diligence Is Also Being Strengthened

IBBI’s current circular list shows that in November 2025 the Board issued a separate circular titled:

“Strengthening due diligence under Section 29A.”

Section 29A is aimed at preventing specified ineligible persons from submitting or controlling resolution plans.

The 2026 misuse circular goes further.

It focuses not merely on whether a bidder is legally eligible, but whether the entire insolvency process itself appears to be serving an improper purpose.

These are complementary safeguards.

Beneficial Ownership Has Also Become More Important

IBBI introduced a Statement of Beneficial Ownership and affidavit format under Regulation 38(3A) of the CIRP Regulations in December 2025.

This matters because connected persons can act through:

layered companies;
trusts;
special-purpose vehicles;
investment entities;
or apparently independent bidders.

Identifying the ultimate beneficial ownership can be essential to determining whether:

a resolution applicant is connected with promoters;
Section 29A is attracted;
or CIRP is being used to recycle assets back into substantially the same economic hands.

What Exactly Must the Insolvency Professional Do?

The circular does not require the IP to conclusively prove fraud before acting.

Instead, the process is more measured.

Step 1: Notice indicators

During the normal course of CIRP or liquidation, the IP identifies one or more suspicious circumstances.

Step 2: Conduct further enquiry

The IP examines records and information reasonably available within the process.

Step 3: Assess context

The IP should not treat isolated indicators as proof.

The circumstances must be evaluated holistically.

Step 4: Form a reasonable view

If reasonable grounds indicate that the process may be serving a fraudulent or malicious purpose unrelated to legitimate insolvency resolution or liquidation, further action is required.

Step 5: Approach the Adjudicating Authority

The IP must apply before the Adjudicating Authority and set out:

relevant facts;
material relied upon;
indicators identified;
and reasons for forming that view.

Which Adjudicating Authority?

For corporate insolvency proceedings, the relevant Adjudicating Authority is ordinarily the National Company Law Tribunal (NCLT) having jurisdiction under the Code.

The Tribunal can then consider what directions are appropriate under the IBC.

The circular itself does not predetermine the Tribunal’s finding.

It requires the IP to bring the concern before the judicial forum.

Does the IP Become an Investigator?

Not in the same sense as:

Enforcement Directorate;
Serious Fraud Investigation Office;
police;
income-tax investigation;
SEBI;
or another statutory investigative agency.

The circular does not turn an RP into a criminal investigator.

The IP’s role is to perform due diligence using:

books;
records;
claims;
CoC material;
transactions;
and information available during the insolvency process.

If the information reasonably indicates abusive use, the IP must escalate it.

Why This Is a Difficult Professional Duty

The RP operates inside the very process they may eventually need to question.

The IP may encounter pressure from:

dominant creditors;
promoters;
resolution applicants;
or other interested stakeholders.

Yet the Insolvency Professionals Regulations require professionals to maintain:

integrity;
objectivity;
independence;
and freedom from improper influence. IBBI’s professional guidance describes these as core Code-of-Conduct obligations.

The September circular therefore reinforces an already fundamental principle:

The Resolution Professional is not the representative of the promoter or the largest creditor.

The professional has independent statutory responsibilities.

Is the CoC’s Commercial Wisdom Enough to Ignore Red Flags?

No.

Commercial wisdom gives the CoC substantial decision-making space under the IBC.

But it does not legalise:

fraud;
malicious initiation;
ineligible applicants;
concealed related-party structures;
manipulated valuation;
or transactions prohibited by law.

A resolution plan cannot become immune from scrutiny merely because creditors voted for it.

The commercial-wisdom doctrine operates within the statutory framework.

What Happens if the IP Ignores Obvious Red Flags?

The exact consequences depend on the facts.

Potential exposure may include:

IBBI inspection;
investigation;
disciplinary proceedings;
action through the Insolvency Professional Agency;
questions regarding professional misconduct;
and adverse observations from NCLT or NCLAT.

The circular is directed to all registered Insolvency Professionals, Insolvency Professional Entities and Insolvency Professional Agencies and is issued under IBBI’s statutory authority under Section 196.

A conscious failure to perform required due diligence can therefore become a regulatory issue.

Does the Circular Apply Only to New CIRPs?

The circular does not frame its obligation merely as a pre-admission requirement for future applications.

It directs IPs to identify indicators during the ordinary course of insolvency proceedings.

Accordingly, the practical relevance extends to CIRP and liquidation assignments being handled by IPs where suspicious circumstances emerge after the circular takes effect.

The actual procedural treatment of an existing matter will depend on its stage and facts.

What About Section 7 Applications?

Section 7 is used principally by financial creditors to initiate CIRP.

The 2026 circular does not say that every financial creditor must now file the September circular’s red-flag report along with its Section 7 application.

Rather, after insolvency begins and an IP gains access to deeper financial information, the professional must remain vigilant to suspicious circumstances.

However, a fraudulent Section 7 initiation can independently attract Section 65.

What About Section 9 Applications?

Section 9 permits operational creditors to initiate CIRP subject to statutory requirements.

The Supreme Court’s landmark Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. decision remains central to the rule that an operational creditor cannot use IBC to bypass a genuine pre-existing dispute.

The broader principle is important here:

IBC is not a substitute for ordinary debt-recovery litigation.

A disputed commercial claim cannot simply be transformed into insolvency pressure.

IBC Is Not a Recovery Forum

The Supreme Court has repeatedly explained that the IBC is intended for insolvency resolution, not merely recovery of individual debts.

This distinction is relevant to misuse.

A creditor may legitimately invoke IBC where:

statutory default exists;
the application is maintainable;
and insolvency law is properly engaged.

But using an insolvency petition solely as coercive pressure to settle an unrelated commercial dispute can attract judicial scrutiny.

What About Section 10 Corporate-Debtor Applications?

Section 10 permits a corporate applicant to initiate its own CIRP subject to statutory requirements.

A voluntary corporate filing can also potentially be abused.

For example, promoters may attempt to use CIRP strategically to:

stop enforcement;
gain moratorium protection;
restructure ownership;
frustrate creditors;
or transfer assets.

Section 65 is capable of addressing fraudulent or malicious initiation irrespective of whether the applicant is a creditor or the corporate debtor itself.

Recent Scrutiny of Section 10 Bona Fides

NCLT decisions continue to examine whether corporate applicants are using Section 10 bona fide or for collateral purposes.

That judicial scrutiny fits directly with IBBI’s September 2026 regulatory approach.

A technically complete application does not give a corporate applicant licence to misuse insolvency for objectives inconsistent with the Code.

Can IBC Be Used to Avoid Tax?

A genuine insolvency can certainly affect tax claims because tax authorities may be creditors and resolution may legally alter claims within the IBC framework.

That is different from deliberately engineering insolvency for the purpose of mitigating tax liabilities.

IBBI expressly lists mitigation of tax liabilities among the forms of suspected misuse reported to it.

The distinction is therefore between:

tax consequences of genuine insolvency

and

insolvency manufactured to produce tax consequences.

Can IBC Be Used to Avoid Prosecution?

The Code contains specific provisions on resolution and corporate liability, but those provisions operate according to statutory conditions.

A company or promoter cannot assume:

“Once CIRP starts, every investigation and prosecution disappears.”

IBBI’s circular specifically flags situations in which insolvency may be used to mitigate:

investigation;
prosecution;
or statutory penalties.

Where another regulator or enforcement agency is already investigating fraud, the IP should therefore examine the connection carefully.

What Is “Ring-Fencing Assets”?

In this context, ring-fencing may refer to structuring transactions or insolvency proceedings so that particular assets are placed beyond the effective reach of:

creditors;
regulators;
investigating agencies;
tax authorities;
or other claimants.

Legitimate ring-fencing can exist in corporate finance.

But using insolvency artificially to shelter assets from lawful enforcement raises an entirely different question.

IBBI specifically mentioned monetisation and ring-fencing of assets as potential forms of IBC misuse reported by agencies.

Can Low Recovery Alone Trigger Section 65?

No.

Section 65 requires fraudulent or malicious initiation for an improper purpose.

A bad commercial outcome does not itself establish malicious initiation.

Similarly, IBBI says no single red flag is conclusive.

Therefore, courts and professionals must avoid hindsight reasoning such as:

“Creditors recovered only 5%, therefore the insolvency must have been fraudulent.”

The relevant enquiry is far broader.

What Is a “Holistic and Contextual Assessment”?

This phrase is central to the circular.

Suppose there is only one bidder.

That alone may mean nothing.

But suppose there is:

one bidder;
bidder connected to promoter;
recently assigned debt;
creditor and bidder sharing beneficial owners;
unusually low valuation;
related-party assets written off;
and a pending fraud investigation.

Taken together, those facts are significantly different.

IBBI therefore asks the IP to examine the entire factual pattern rather than applying a mechanical checklist.

What Should an IP’s Due-Diligence File Contain?

As a matter of prudent professional practice, documentation may include:

chronology of CIRP initiation;
creditor identity;
debt assignment records;
beneficial ownership information;
related-party analysis;
CoC voting structure;
group-company relationships;
inter-company loan schedules;
valuations and assumptions;
resolution-applicant ownership;
bidding participation;
previous regulatory proceedings;
enforcement orders;
unusual write-offs;
suspicious advances;
and reasons for concluding whether escalation is or is not warranted.

The circular specifically requires an application to identify:

indicators;
material relied upon;
and reasons supporting the IP’s view.

A properly maintained due-diligence record therefore protects both the process and the professional.

Does Suspicion Require the IP to Stop CIRP?

The circular does not state that identification of a red flag automatically suspends the entire insolvency process.

The professional is expected to:

inquire further;
assess the facts;
and approach the Adjudicating Authority when reasonable grounds exist.

The Tribunal can then determine what directions are appropriate.

This prevents an IP from unilaterally converting suspicion into a final finding of fraud.

Role of NCLT

NCLT may be asked to consider issues including:

Section 65 allegations;
connected-party structures;
process integrity;
avoidance transactions;
eligibility questions;
and other directions within its IBC jurisdiction.

Section 60(5) also gives NCLT broad jurisdiction over questions of law and fact arising out of or in relation to insolvency resolution or liquidation.

The September circular therefore places judicial supervision at the centre of the response.

Section 65 Penalty Can Be Significant

Where fraudulent or malicious initiation is ultimately established, Section 65 permits a penalty:

not less than ₹1 lakh and up to ₹1 crore.

But the penalty is not automatic simply because an IP reports a concern.

The Adjudicating Authority must determine the legal issue.

False Information Can Create Separate Consequences

IBC also contains separate provisions dealing with false information in insolvency applications.

For example, the Code prescribes consequences where false information is knowingly furnished in specified initiation applications.

Therefore, an applicant who manufactures:

debt records;
default evidence;
creditor relationships;
or material facts

may face consequences beyond an unsuccessful insolvency petition.

Practical Example 1: Connected Creditor CIRP

A promoter-linked entity acquires debt two weeks before CIRP.

It initiates Section 7 proceedings.

After admission, it controls most of the CoC voting share.

A promoter-connected bidder becomes the only serious resolution applicant.

The IP should now examine:

debt assignment;
ultimate ownership;
financing;
CoC control;
bidder relationship;
and valuation.

The September circular specifically flags this type of pattern.

Practical Example 2: Genuine Bank-Led Insolvency

A scheduled bank has lent ₹800 crore.

The borrower defaults after a genuine industry downturn.

The bank files Section 7.

It naturally dominates the CoC because it provided most of the financing.

That is not the suspicious pattern contemplated by the first red flag; IBBI expressly carves out scheduled banks and public financial institutions in that indicator.

Practical Example 3: Group Companies Collapse Together

Several companies in a real-estate group enter insolvency after the parent group loses financing.

They share promoters and addresses.

That alone does not establish misuse.

However, overlapping creditor control, repeated connected bidders and unexplained asset transfers could require deeper inquiry.

Practical Example 4: Massive Haircut

Claims total ₹5,000 crore.

Independent valuation shows enterprise value of only ₹400 crore.

Best competitive bid is ₹450 crore.

The large headline haircut is not itself evidence of misuse.

Contrast that with a ₹200 crore resolution where valuations indicate substantially greater recoverable value and there was almost no bidding competition.

The second case requires more scrutiny.

Practical Example 5: Pending Enforcement Investigation

A company under investigation for alleged financial fraud enters CIRP shortly after enforcement action.

A connected creditor controls the CoC.

Important assets had previously moved through related entities.

The IP should examine whether CIRP is genuine insolvency resolution or part of a strategy to interfere with enforcement.

Practical Example 6: Commercially Explainable Group Loans

A manufacturing company routinely finances a wholly owned distribution subsidiary.

The transactions are:

properly documented;
approved;
reflected in accounts;
and connected to real business.

The mere existence of related-party loans does not make them abusive.

IBBI’s concern is particularly directed toward substantial transactions lacking genuine operations or adequate commercial justification.

What the Circular Does Not Mean

Several overstatements should be avoided.

It does not mean every low-value resolution is fraudulent.

Economic distress can destroy enormous value.

It does not mean every related-party transaction is illegal.

Group companies legitimately transact with one another.

It does not mean one bidder automatically proves collusion.

Some distressed businesses simply attract little interest.

It does not mean every company facing investigation is prohibited from CIRP.

Genuine insolvent companies can simultaneously face regulatory investigations.

It does not mean the RP makes the final fraud determination.

The IP identifies, investigates and places the issue before the Adjudicating Authority.

Why the Circular Is Important for Creditors

Creditors must increasingly expect questions concerning:

debt acquisition;
creditor relationships;
beneficial ownership;
voting dominance;
connected parties;
and commercial rationale.

A creditor who acquires debt immediately before filing CIRP should preserve evidence explaining:

purchase consideration;
commercial rationale;
source of funding;
relationship with debtor;
relationship with promoters;
and independence.

Documentation will become increasingly important.

Why It Matters for Promoters

Promoters should not assume that formally separating connected entities will prevent scrutiny.

The IP may now examine:

common addresses;
directors;
beneficial ownership;
inter-company dealings;
creditor linkages;
and resolution-applicant relationships.

Transactions that are economically connected can attract attention even where corporate entities are technically distinct.

Why It Matters for Resolution Applicants

Resolution applicants should conduct their own enhanced diligence.

They should be prepared to disclose:

ultimate beneficial ownership;
connected entities;
promoter relationships;
financing arrangements;
Section 29A eligibility;
prior transactions with the corporate debtor;
and links with other group insolvencies.

A bidder appearing repeatedly across related corporate debtors may itself become a red flag under the September circular.

Why It Matters for Insolvency Professionals

For IPs, the change is especially significant.

They now face an express regulatory expectation to do more than administer timelines and meetings.

The IP must be prepared to ask uncomfortable questions.

For example:

Why was this debt assigned immediately before CIRP?

Who ultimately owns the creditor?

Why are five group companies entering insolvency together?

Why is there only one bidder?

Why is creditor recovery so low compared with valuation?

Why were ₹300 crore of group advances written off?

Is there an existing fraud investigation?

Those questions are now part of process integrity.

Interaction With Professional Independence

IBBI’s Code of Conduct requires Insolvency Professionals to maintain integrity, objectivity and independence from external influence.

This becomes especially important when the dominant creditor prefers that an IP ignore suspicious facts.

The RP’s professional duties do not disappear because a creditor holds 90% voting power.

Is This a Move Toward Forensic Insolvency?

To some extent, yes.

Modern insolvency increasingly involves:

forensic transaction review;
beneficial-ownership analysis;
connected-party mapping;
valuation scrutiny;
regulatory coordination;
and enforcement-interface issues.

The September 2026 circular makes this trend explicit.

The insolvency professional is expected to recognise when ordinary insolvency administration begins to reveal signs of broader abuse.

Connection With Enforcement Agencies

The circular itself arose from information supplied by law-enforcement and regulatory agencies.

Separately, recent public reporting in September 2026 indicates increasing Enforcement Directorate scrutiny of cases involving alleged manipulation of insolvency resolutions and promoter-connected reacquisition of assets.

These developments suggest that IBC proceedings can no longer be treated as isolated from:

PMLA;
corporate fraud enforcement;
securities regulation;
taxation;
and other investigative regimes.

Does IBC Protect Fraudulent Transactions Because a Plan Is Approved?

No general proposition of that breadth is safe.

Resolution plans have powerful statutory consequences, but the Code also contains safeguards relating to:

fraud;
avoidance transactions;
resolution-applicant eligibility;
criminal liability;
and statutory compliance.

IBBI’s new due-diligence direction is clearly intended to ensure that abuse is identified before the insolvency process itself becomes the vehicle through which questionable arrangements are legitimised.

Can Stakeholders Alert the RP?

Yes.

Creditors, employees, shareholders, regulators and other stakeholders may bring relevant facts to the Resolution Professional.

For example:

hidden promoter connections;
undisclosed group companies;
suspicious debt assignments;
suppressed assets;
related-party loans;
or collusive bidding information.

The IP should independently verify such information rather than simply accept allegations.

Can a Corporate Debtor Raise Section 65?

Yes, where it has credible material showing fraudulent or malicious initiation.

But Section 65 should not be used as a routine defensive allegation in every insolvency proceeding.

A corporate debtor cannot merely say:

“The creditor filed IBC to pressure us, therefore Section 65 applies.”

Evidence of fraudulent or malicious purpose is necessary.

Section 65 Is Not a Substitute for Disputing the Debt

A debtor may have other defences depending on whether proceedings arise under:

Section 7;
Section 9;
or Section 10.

For example, an operational creditor case may involve a pre-existing dispute.

A Section 65 allegation is different.

It attacks the purpose and bona fides of initiation, not merely whether the underlying debt or default has been established.

Common Myths

Myth 1: “Every large IBC haircut proves fraud.”

Incorrect.

Claims may greatly exceed actual enterprise value.

Myth 2: “If the CoC approved the plan, misuse cannot be investigated.”

Incorrect.

Commercial wisdom does not legitimise fraud or statutory violations.

Myth 3: “IBBI’s September circular makes every IP a criminal investigator.”

Incorrect.

IPs conduct process-related due diligence and escalate reasonable concerns to the Adjudicating Authority.

Myth 4: “A single red flag automatically proves malicious CIRP.”

Incorrect.

IBBI expressly says the indicators are illustrative and not individually conclusive.

Myth 5: “Related-party loans are prohibited.”

Incorrect.

The suspicious issue is unexplained, commercially unsupported or otherwise questionable related/group transactions.

Myth 6: “The circular applies only to Section 7 petitions.”

Incorrect.

It concerns possible misuse of CIRP and liquidation more broadly.

Myth 7: “The new rule requires every creditor to obtain an IP due-diligence certificate before filing IBC.”

Incorrect.

The 9 September 2026 circular is directed principally to Insolvency Professionals during the process.

Myth 8: “Section 65 is new.”

Incorrect.

Section 65 has long penalised fraudulent or malicious initiation. The new circular strengthens detection and escalation.

Practical Due-Diligence Checklist for Insolvency Professionals

An IP facing unusual circumstances should consider examining:

Who initiated the CIRP?
When was the debt created?
Was the debt recently assigned?
Who funded the creditor?
Who ultimately controls the creditor?
Does the creditor have links with promoters?
Does one creditor dominate the CoC?
Are multiple connected companies in CIRP simultaneously?
Are CoC memberships overlapping?
Are resolution applicants repeated across group companies?
Was there genuine competitive bidding?
Are valuations defensible?
Is creditor recovery inexplicably disconnected from value?
Are related-party loans commercially justified?
Were major receivables written off shortly before insolvency?
Are there unexplained advances or investments?
Is another regulator investigating fraud?
Are enforcement proceedings underway?
Is the process effectively returning assets to connected parties?
Does the overall pattern suggest an objective unrelated to genuine insolvency resolution?

No single answer should decide the case.

The assessment must remain contextual.

What Businesses Should Do Now

Corporate groups should improve documentation surrounding:

inter-company lending;
debt assignments;
board approvals;
related-party transactions;
asset transfers;
restructuring;
write-offs;
valuations;
and beneficial ownership.

Transactions that are perfectly legitimate commercially may appear suspicious later if records do not explain them.

The new circular therefore has consequences well before CIRP begins.

What Creditors Should Do Before Filing IBC

Creditors should ensure that they can demonstrate:

genuine debt;
genuine default;
commercial rationale;
accurate disclosures;
lawful assignment where relevant;
and absence of artificial arrangements.

IBC should not be treated merely as:

collection pressure;
bargaining leverage;
or a shortcut around another regulatory framework.

What Resolution Applicants Should Check

Before bidding, applicants should ensure that:

ownership structures are transparent;
Section 29A diligence is complete;
funding sources are documented;
connections with promoters are disclosed;
beneficial ownership statements are accurate;
and prior dealings with the corporate debtor can be explained.

An apparently attractive distressed acquisition can become highly problematic if it is later characterised as a connected-party asset recycling arrangement.

Frequently Asked Questions

What did IBBI change on 9 September 2026?

IBBI issued Circular No. IBBI/CIRP/105/2026 requiring Insolvency Professionals to identify and investigate warning signs that CIRP or liquidation may be used for fraudulent or malicious purposes and to approach the Adjudicating Authority where reasonable grounds exist.

What misuse is IBBI concerned about?

IBBI mentioned suspected use of IBC to mitigate tax liabilities, bypass regulatory scrutiny, interfere with investigations/prosecution/penalties, monetise assets or ring-fence assets.

What are the main red flags?

They include:

recently assigned debt and dominant creditor;
connected companies entering CIRP together;
overlapping CoCs;
poor bidding competition;
recurring resolution applicants;
unexplained disproportionate recoveries;
fraud investigations by other agencies;
and questionable related-party loans or investments.

Does one red flag prove fraud?

No.

IBBI expressly says the indicators are illustrative and not individually conclusive.

What must the RP do after seeing a red flag?

Conduct further enquiry using available records and information and make a holistic assessment.

When must NCLT be approached?

Where the IP forms a reasonable view that the process may be serving a fraudulent or malicious purpose unrelated to genuine resolution or liquidation.

What information should the application contain?

The indicators noticed, material relied upon and reasons supporting the IP’s view.

What is the penalty under Section 65?

For fraudulent or malicious initiation, the penalty may range from ₹1 lakh to ₹1 crore.

Does a large haircut prove IBC misuse?

No.

A large gap between claims and recovery can arise legitimately. IBBI’s concern is disproportionate realisation unsupported by a proper valuation exercise.

Is IBC a debt-recovery mechanism?

The Code is fundamentally an insolvency-resolution framework, not simply a substitute for ordinary recovery litigation.

Can promoters reacquire their company through IBC?

Any resolution applicant must comply with the Code, including Section 29A and applicable beneficial-ownership and eligibility requirements. Structures designed to indirectly circumvent those restrictions can attract serious scrutiny.

Why This Circular Matters

The September 2026 circular changes the practical expectation from Insolvency Professionals.

Previously, the question might often have been:

“Have all CIRP procedural steps been complied with?”

Now another question becomes unavoidable:

“Does the overall process appear to be a genuine insolvency proceeding at all?”

That is a deeper form of regulatory supervision.

It places process integrity alongside procedural compliance.

Conclusion

IBBI’s new due-diligence circular marks an important development in India’s insolvency framework.

On 9 September 2026, IBBI formally directed Insolvency Professionals to remain alert to circumstances indicating that the Insolvency and Bankruptcy Code may be used for purposes unrelated to genuine insolvency resolution or liquidation.

The Board specifically identified concerns involving:

tax mitigation;
avoidance of regulatory scrutiny;
interference with investigations or penalties;
asset monetisation and ring-fencing;
connected creditors;
coordinated group insolvencies;
weak competitive bidding;
unexplained low recoveries;
fraud investigations;
and suspicious related-party transactions.

The listed indicators are not findings of wrongdoing.

IBBI expressly cautions that they may also arise in genuine commercial distress and that no single indicator should be treated as conclusive.

The regulatory obligation is therefore one of reasoned due diligence, not automatic suspicion.

An Insolvency Professional who encounters such circumstances must:

identify → enquire → assess holistically → form a reasonable view → approach NCLT where warranted.

The circular also gives renewed practical importance to Section 65 IBC, which permits penalties ranging from ₹1 lakh to ₹1 crore where insolvency or liquidation proceedings are initiated fraudulently or maliciously for a purpose other than legitimate insolvency resolution or liquidation.

At the same time, the September circular forms part of a larger regulatory movement.

IBBI has also strengthened:

Section 29A due diligence;
beneficial-ownership disclosures;
valuation standards;
inspection and investigation processes;
and CIRP monitoring during 2025–2026.

The direction of Indian insolvency regulation is therefore becoming clear.

The IBC cannot be treated merely as a procedural shield through which companies, creditors or connected parties restructure transactions while regulators look only at formal compliance.

Increasingly, professionals are expected to examine the economic substance of the process.

That does not mean every unusual insolvency is fraudulent.

It means unusual facts must now be investigated and explained.

The core principle can therefore be stated simply:

IBC is meant to resolve insolvency—not to manufacture it, disguise fraud or create a regulatory escape route.

This article reflects the Insolvency and Bankruptcy Code, 2016, the IBC Amendment Act, 2026, IBBI Circular No. IBBI/CIRP/105/2026 dated 9 September 2026, and publicly available regulatory material up to September 2026. Whether a particular CIRP or liquidation is fraudulent or malicious depends on its specific facts and ultimately falls within the jurisdiction of the competent Adjudicating Authority. This article is intended for general legal information and academic discussion and does not constitute legal advice.