The Insolvency & Bankruptcy Board of India (IBBI) is actively addressing concerns regarding the potential misuse of the nation’s insolvency framework. The board has circulated a comprehensive discussion paper, highlighting various “red flags” and outlining measures to prevent the insolvency law from being exploited for purposes other than its intended aim of genuine corporate resolution. This initiative stems from information received from law enforcement and other regulatory bodies, indicating instances where the Corporate Insolvency Resolution Process (CIRP) has been invoked with malicious intent.
The IBBI has identified several concerning trends, including the use of CIRP to circumvent standard debt recovery procedures, mitigate tax and other statutory liabilities, or to facilitate the closure or merger of companies without appropriate regulatory oversight. Furthermore, the framework has reportedly been utilized to sidestep ongoing or anticipated investigations, prosecutions, and penalties under other statutes, and even to manipulate asset monetization or ring-fencing.
To combat these abuses, the discussion paper, accompanied by a draft circular, outlines at least nine specific indicators that insolvency professionals should be vigilant about. These include situations where companies with negligible operations, revenue, or assets, and a history of negative net worth, initiate insolvency proceedings. Similarly, red flags are raised when companies without operational activity possess substantial loans or investments from related or group entities, which are subsequently written off.
The IBBI also emphasizes scrutiny of companies that have received qualified audit opinions or where auditors have expressed concerns about the recoverability of loans. Another area of focus is insolvency actions initiated by a single, dominant creditor who subsequently controls the committee of creditors during the CIRP.
Further warnings are issued for cases where valuers or auditors face challenges in verifying asset classes due to a lack of documentation or uncooperative former management. The board also highlights concerns about minimal participation from creditors or the presence of a common resolution applicant across multiple connected entities. Instances where the realization for creditors is disproportionately low compared to admitted claims, and where valuation exercises lack adequate support, are also under intense scrutiny.
The IBBI proposes that after a thorough examination by the insolvency professional, any cases exhibiting suspected fraud or malicious intent should be promptly brought before the National Company Law Tribunal (NCLT) for appropriate action. This proactive stance by the IBBI aims to fortify the integrity of the insolvency framework and ensure its effective application in genuine cases of financial distress, while preventing its perversion for illicit gains or avoidance of liabilities in the broader business landscape.
