The Insolvency and Bankruptcy Board of India (IBBI) released a Discussion Paper on 14 August 2026 addressing a growing concern: the misuse of the Corporate Insolvency Resolution Process (CIRP) for purposes that have nothing to do with genuine insolvency resolution. The regulator has proposed guidance to help Insolvency Professionals (IPs) identify and report such cases.
THE PROBLEM
IBBI said it has received inputs from law-enforcement and regulatory agencies showing that some promoters and creditors are using CIRP to settle debts outside the usual recovery route, reduce tax and other liabilities, quietly wind up or merge companies without scrutiny, or move assets out of reach, all under the cover of insolvency proceedings rather than to genuinely resolve a company’s financial distress. Left unchecked, this trend risks turning a process meant to rescue struggling businesses into a convenient shield for those looking to escape accountability elsewhere.
WHAT THE LAW ALREADY SAYS
Under Section 65 of the Insolvency and Bankruptcy Code, 2016, anyone who initiates CIRP fraudulently, or for a purpose other than resolving insolvency, can face a penalty of up to Rs. 1 crore from the National Company Law Tribunal (NCLT). Courts have already held that even if an insolvency application meets every technical requirement, the NCLT need not admit it if the intent behind filing is malicious. IBBI’s paper does not create new law. It draws together existing duties under Sections 18, 19(2), 25(2)(j), 60(5) and 65 of the Code, along with the Code of Conduct for IPs, to spell out how professionals should act on them.
THE RED FLAGS
The draft circular attached to the paper lists warning signs IPs should watch for, while making clear the list is not exhaustive. These include companies with little real business activity and a negative net worth; large related-party loans written off without explanation; audit reports flagging weak internal controls; links to ongoing regulatory investigations; a single creditor controlling the Committee of Creditors; groups of connected companies filing for CIRP together; valuers unable to verify assets for lack of cooperation; a resolution process with almost no competition; and settlements that are wildly disproportionate to admitted claims.
WHAT INSOLVENCY PROFESSIONALS MUST DO
Where an IP spots any such signs, the paper requires them to personally review the matter and form a reasoned opinion, a duty they cannot delegate. If they conclude the CIRP was indeed initiated fraudulently or for an improper purpose, they must file an application before the NCLT under Sections 60(5) and 65. The circular is meant to apply not just to fresh filings but to CIRP cases already underway, meaning IPs may need to revisit ongoing matters for warning signs they may have missed.
WHY IT MATTERS
The move responds to a real gap: IBBI itself has noted that red flags have often gone unexamined or unescalated, letting misuse slip through even where Section 65 could have applied. That said, the guidance is explanatory rather than binding, which leaves room for an IP to argue they exercised adequate judgment even after missing a warning sign. Some practitioners may also point out that a non-exhaustive list, while flexible, offers less certainty than a fixed checklist would. The comment window, just ten days, ending 24 August 2026, was also unusually short for a paper with this much practical impact.
THE BIGGER PICTURE
Still, the Discussion Paper marks a meaningful step forward. It reframes IPs not as neutral administrators but as active gatekeepers responsible for protecting the integrity of the insolvency process. Fraudulent use of CIRP does more than break a rule. It erodes creditor confidence, wastes judicial time and weakens the broader credit system. If this guidance becomes a formal circular, IPs are likely to become considerably more cautious, and more accountable, the next time an insolvency filing does not quite add up.