IBBI proposes curbs on malicious insolvency filings after another resolution professional’s arrest
The Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper proposing tighter checks on the fraudulent or malicious use of the Corporate Insolvency Resolution Process (CIRP).
The move follows the arrest of an insolvency professional accused of misusing the resolution process — re-admitting previously rejected claims and accepting questionable related-party claims while allegedly aware of suspicious fund flows.
The proposal establishes that Insolvency Professionals (IPs) carry a "non-delegable duty" to act with integrity and to flag potentially fraudulent case initiations, rather than passively administering the process.
IBBI has identified specific red-flag indicators (shell-like companies, unexplained related-party debt, single-creditor-dominated committees, simultaneous filings by common promoters, missing documentation) and invited public comments on the proposals until August 24, 2026.
Insolvency and Bankruptcy Code, 2016: Framework and Institutions
The Insolvency and Bankruptcy Code (IBC), 2016 consolidated India's fragmented insolvency laws into a single time-bound framework for resolving corporate and individual insolvency, replacing the earlier regime under the Sick Industrial Companies Act and multiple other statutes.
Key Details
- National Company Law Tribunal (NCLT) is the Adjudicating Authority for corporate insolvency; it must admit or reject a CIRP application within 14 days of filing.
- CIRP is to be completed within 180 days, extendable by the NCLT to a maximum of 330 days (including litigation time), failing which liquidation is triggered.
- The Insolvency and Bankruptcy Board of India (IBBI), a statutory regulator set up under the IBC itself, regulates Insolvency Professionals, Insolvency Professional Agencies, and Information Utilities, and frames CIRP/liquidation regulations.
- On admission, a moratorium under Section 14 freezes suits, recoveries, and asset transfers against the corporate debtor until resolution or liquidation, insulating it during the process.
The IBBI's new discussion paper adds a layer of professional-conduct guidance atop this existing statutory framework, aimed at IPs who administer the CIRP once it is admitted by the NCLT.
Section 65 IBC: Penalising Fraudulent or Malicious Initiation
Section 65 of the IBC specifically penalises initiating CIRP or liquidation proceedings fraudulently or with malicious intent for a purpose other than genuine insolvency resolution — for example, to harass a solvent debtor, evade other legal proceedings, or settle scores.
Key Details
- The Adjudicating Authority (NCLT) may impose a penalty ranging from ₹1 lakh to ₹1 crore on a person found to have fraudulently or maliciously initiated the process.
- Section 60(5), a residuary jurisdiction clause, empowers the NCLT to entertain any application arising out of or in relation to the CIRP or liquidation of a corporate debtor — this is the procedural gateway through which a Section 65 application is filed.
- Under the new IBBI guidance, an IP who suspects malicious initiation is now expected to proactively file an application under Section 60(5) read with Section 65, rather than simply processing claims — many IPs have historically not taken this step.
The arrest that triggered this paper allegedly involved an IP failing this very duty — accepting and re-admitting claims without escalating suspicious fund flows for adjudication under Sections 60(5)/65.
Regulatory Oversight of Insolvency Professionals
Insolvency Professionals are licensed intermediaries central to the IBC's design — they take over management of the corporate debtor (as Interim Resolution Professional/Resolution Professional), verify claims, and run the Committee of Creditors (CoC) process, making their integrity critical to preventing misuse of the Code.
Key Details
- IPs are regulated by IBBI through registration, a Code of Conduct, and disciplinary proceedings for misconduct, including potential cancellation of registration.
- The Committee of Creditors (CoC), comprising financial creditors, must approve any resolution plan by a 66% voting share threshold; concentration of debt with a single or related creditor (a red flag IBBI has now flagged) can let that party dominate CoC decisions.
- Misuse patterns IBBI flagged include using CIRP to ring-fence promoter assets from other legal claims, achieve debt settlement outside normal channels, or gain tax advantages — none of which reflect genuine insolvency resolution, the Code's core objective under its Preamble.
By codifying red flags and reinforcing the non-delegable duty on IPs to escalate suspicious filings, IBBI is targeting the professional layer that gatekeeps the CIRP process, following a case where that gatekeeping allegedly failed.
- Section 65 IBC penalty for fraudulent/malicious initiation: ₹1 lakh to ₹1 crore, imposed by the Adjudicating Authority (NCLT).
- CIRP timelines under the IBC: 180 days standard, extendable to a maximum of 330 days including litigation.
- IBBI's discussion paper is dated August 14, 2026; public comments were invited until August 24, 2026.
- The disputed related-party claims in the triggering case were reported at approximately ₹35 crore.