IBBI Issues Guidance on Identifying Fraudulent CIRP Initiation: What Insolvency Professionals Must Watch For

Background: Why This Guidance Was Needed

The Insolvency and Bankruptcy Board of India (IBBI) issued a discussion paper on August 14, 2026, proposing a draft circular that provides guidance to Insolvency Professionals (IPs) on identifying fraudulent or malicious initiation of the Corporate Insolvency Resolution Process (CIRP) under Sections 60(5) and 65 of the Insolvency and Bankruptcy Code, 2016 (IBC). The comment period closed on August 24, 2026.

Section 65(1) of the IBC empowers the Adjudicating Authority (NCLT) to impose a penalty where the CIRP has been initiated fraudulently or with malicious intent for any purpose other than the resolution of insolvency or liquidation. The IBBI noted that it has received information from law enforcement and regulatory agencies indicating that the CIRP framework is, in certain cases, being used with malafide intent to settle debts outside the ordinary recovery process, mitigate tax and statutory liabilities, close or merge companies without regulatory scrutiny, avoid pending investigations and prosecutions, and monetise or ring-fence assets.

In practice, the abuse of CIRP for purposes other than genuine insolvency resolution has been a persistent concern since the IBC's early years. The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17 upheld the constitutional validity of the IBC but observed that the Code must not be allowed to become a tool for recovery or a substitute for debt enforcement proceedings. The NCLAT in Rajnish Jain v. Gagan Buildcon Pvt. Ltd. (2023) similarly cautioned against the use of CIRP as a pressure tactic by creditors whose primary objective is debt recovery rather than resolution.

The Nine Illustrative Red Flags

The draft circular sets out an illustrative (non-exhaustive) list of nine indicators that should alert an IP to the possibility of fraudulent or malicious initiation:

The draft circular consolidates the existing statutory and regulatory provisions that impose duties on IPs in this context. Under Section 18 of the IBC, the IP must collect all information relating to the assets, finances, and operations of the corporate debtor. Section 19(2) empowers the IP to seek directions from the Adjudicating Authority where the erstwhile management does not cooperate. Section 25(2)(j), read with Regulation 35A of the CIRP Regulations, 2016, requires the IP to form an opinion and make a determination on avoidance transactions under Sections 43 (preferential transactions), 45 (undervalued transactions), 50 (extortionate credit transactions), and 66 (fraudulent trading).

Where the IP identifies any of the listed indicators, the draft circular requires the IP to review the indicators in detail, form a considered opinion, and, if the IP concludes that the insolvency process was initiated fraudulently or with malicious intent, file an application before the Adjudicating Authority under Section 60(5) read with Section 65 of the Code.

In practice, the draft circular does not create new substantive obligations. The IBBI has framed it as explanatory guidance on existing duties. However, the explicit listing of indicators and the clear expectation that IPs will file Section 65 applications when warranted will significantly raise the standard of practice. IPs who fail to examine these indicators risk disciplinary action under the IBBI (Insolvency Professionals) Regulations, 2016, particularly Clauses 1, 2, 3, 13, and 14 of the Code of Conduct, which require integrity, objectivity, and diligence.

Implications for Creditors and Corporate Debtors

The proposed guidance has implications beyond IPs. Financial creditors and operational creditors who initiate CIRP must now anticipate that the IP will systematically scrutinise the circumstances of initiation. Creditors whose primary objective is debt recovery rather than genuine resolution may face Section 65 applications, which carry penalties of up to Rs 1 crore under Section 65(1). Corporate debtors and their erstwhile management who use CIRP to avoid regulatory scrutiny or ring-fence assets will face earlier detection under the proposed framework.

The Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353 held that the NCLT must examine whether the application for CIRP is complete and whether there is no disciplinary proceeding pending against the proposed resolution professional. The proposed guidance extends this principle by requiring the IP, once appointed, to continuously monitor for indicators of abuse throughout the CIRP.

Sources and References

1. IBBI Discussion Paper dated August 14, 2026: Guidance to Insolvency Professionals for Due Diligence to Identify Fraudulent or Malicious Initiation of CIRP

2. Sections 18, 19(2), 25(2)(j), 60(5), and 65, Insolvency and Bankruptcy Code, 2016

3. Regulation 35A, IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

4. Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17

5. Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353

This article is for informational purposes only and does not constitute legal advice. For specific guidance on CIRP obligations, consult a qualified insolvency professional or legal practitioner.