The Insolvency and Bankruptcy Board of India (IBBI) has flagged the misuse of the insolvency process by companies seeking to evade taxes, conceal assets and avoid regulatory or criminal action, saying the bankruptcy framework is in some cases being used for purposes other than rescuing distressed businesses.
In a recent discussion paper, the insolvency regulator said law enforcement agencies have identified instances where the Insolvency and Bankruptcy Code (IBC) has allegedly been invoked with malicious intent. Such cases include companies using insolvency proceedings to settle private debts, facilitate undisclosed mergers or combinations without regulatory scrutiny, and shield assets from enforcement action.
The IBBI has proposed putting greater responsibility on insolvency professionals to identify and report such cases. Since insolvency professionals take control of the affairs and financial records of companies undergoing the corporate insolvency resolution process (CIRP), the regulator believes they are well placed to detect early signs of fraud or misuse.
Under the proposed framework, insolvency professionals would be required to actively examine transactions and circumstances for indications of malicious or fraudulent intent and report suspicious cases to the adjudicating authority for appropriate action.
The discussion paper also sets out several red flags that professionals should look for. These include shell companies with little or no genuine business activity or assets, large and unexplained loans or transactions involving related parties, and instances where a single creditor unexpectedly assumes control of the insolvency process.
Other warning signs include auditors being unable to verify the existence or value of company assets because of a lack of cooperation, as well as multiple interconnected companies entering insolvency proceedings around the same time.
The regulator said inconsistent reporting of such cases by insolvency professionals has, in the past, delayed action by authorities and allowed potential abuse of the IBC to go undetected.
The proposals are aimed at strengthening the role of insolvency professionals as the first line of defence against fraudulent or abusive use of the bankruptcy framework. The IBBI has invited comments from stakeholders, including professionals, lawyers and financial experts, on the proposed measures. The deadline for submitting comments is August 24, 2026.