India’s Insolvency Framework and the Duty of Professionals to Report Misuse of the IBC

India’s insolvency framework places insolvency professionals at the operational centre of the corporate insolvency resolution process (CIRP), and with that role comes a responsibility to guard against abuse of the process. Where a professional forms a view, on reasonable grounds, that insolvency proceedings are being used for purposes other than genuine resolution, the appropriate response is to bring the matter to the Adjudicating Authority, the National Company Law Tribunal (NCLT). This explainer discusses the kinds of red-flag indicators that should prompt scrutiny, the standard of “reasonable grounds”, the documentation practitioners should maintain, and the mechanics of raising misuse before the tribunal.

It is written for insolvency professionals, creditors, corporate counsel and compliance teams for whom this is a live compliance and risk-management concern.

The statutory setting, the IBC and the role of the IBBI

The Insolvency and Bankruptcy Code, 2016 (the IBC or the Code) is administered by the Insolvency and Bankruptcy Board of India (IBBI), the regulator responsible for insolvency professionals, insolvency professional agencies and information utilities. Section 196 of the IBC empowers the IBBI to issue guidelines, directions and circulars to the persons it regulates, and the Board periodically issues circulars addressed principally to registered insolvency professionals conducting CIRPs. Practitioners should always verify the current text of any IBBI circular directly on the Board’s website, as the regulatory framework is amended frequently.

At the heart of good practice is the recognition that abuse of the insolvency process is a matter the professional is expected to identify and act upon. Insolvency professionals see the creditor register, the claims, the transaction history and the conduct of the resolution process at close quarters. They are therefore well placed to detect patterns that suggest the machinery of the Code is being turned to improper ends, for example, to shed liabilities, defeat legitimate creditors, or transfer value to connected parties under the cover of a court-supervised process. Where such patterns cross the threshold of reasonable grounds, the professional should make an application to the Adjudicating Authority setting out the grounds relied upon and the material supporting them.

It is helpful to identify the recurring indicators that should prompt scrutiny. Each is a signal, not a conclusion; the presence of one or more indicators triggers an assessment, and it is the assessment, properly documented, that determines whether reasonable grounds exist. Common indicators include:

• Creditor concentration. A single non-bank creditor dominates the process, often through a late assignment of debt.
• Debtor clustering. Groups of corporate debtors with overlapping promoters, directors or registered addresses.
• Minimal competition. Little or no competitive participation in the resolution process, or a recurring resolution applicant across connected files.
• Disproportionate realisation. Realisations grossly out of line with admitted claims, unsupported by valuation.
• Fraud linkage. Connection to fraud investigations pending before another regulator or investigating agency.
• Related-party write-offs. Substantial related-party loans written off without independent justification.

The red-flag indicators, practical meaning and evidence examples

Understanding each indicator in operational terms is essential. A report of suspected misuse should be grounded in objective evidence, not impression. The following sections explain what each indicator means, why it signals possible abuse, and the concrete documents and data points an insolvency professional should gather before forming a view.

Indicator 1, a single non-bank creditor dominates or debt is assigned late

Where one non-bank creditor holds a controlling share of the admitted debt, particularly where that position was acquired by assignment shortly before or during the CIRP, the arrangement may be engineered to control the committee of creditors and steer the outcome. Section 5(7) of the IBC defines a financial creditor, and the classification of a creditor as financial or operational determines its voting rights and role. A late assignment that transforms a modest claim into a dominant voting bloc warrants close examination.

Evidence to seek includes the assignment documents and their execution dates, the creditor register and how it evolved, the affidavit of the transferor of the debt, committee voting records, and meeting minutes showing whether the dominant creditor consistently drove decisions. Timelines matter: an assignment executed days before the constitution of the committee is a stronger signal than one predating the insolvency by years.

Indicator 2, clusters of debtors with overlapping promoters, addresses or directors

When several corporate debtors admitted into insolvency share promoters, directors or a registered office, the cluster may reflect a coordinated strategy rather than coincidental distress. Common control can be used to move assets between entities, orchestrate connected resolution applicants, or manufacture claims.

Evidence includes Registrar of Companies (ROC) filings retrieved through the Ministry of Corporate Affairs, common Director Identification Numbers or PAN across entities, shared office leases, simultaneous or closely-spaced admission dates, and the identity of resolution applicants across the connected files. Mapping the corporate web early, and preserving the ROC extracts that establish it, is critical.

Indicator 3, minimal competitive participation or a recurring resolution applicant

A resolution process that attracts no genuine market interest, or that repeatedly draws the same applicant across connected debtors, may not have been marketed in good faith. The absence of a genuine market test undermines value maximisation, which is one of the Code’s central objectives.

Evidence includes the expressions of interest and requests for resolution plans issued, the responses received, the bid history, and the profiles and track record of resolution applicants, especially where the same applicant recurs across debtors under common control. The insolvency professional should also preserve records of the marketing effort undertaken, so that a lack of participation can be distinguished from a lack of outreach.

Indicator 4, realisation grossly disproportionate to admitted claims without valuation

Where the value realised through a resolution plan or sale is markedly out of proportion to the admitted claims and asset base, and no credible valuation supports the figure, the process may be depressing value to benefit a favoured party. This is one of the clearer signals of engineered outcomes.

Evidence includes registered valuers’ reports (or their absence), asset schedules, forensic comparisons of book value against market value, and the sale process documentation. Where valuations are missing or exhibit extreme variance, the professional should consider the appointment of registered valuers as required under the CIRP Regulations and preserve all valuation workpapers.

Indicator 5, linkage to fraud proceedings before another regulator

A connection between the debtor, its promoters or its assets and an ongoing fraud investigation before another authority, such as the Securities and Exchange Board of India, the Enforcement Directorate or a criminal investigating agency, heightens the risk that the insolvency is being used to insulate wrongdoers or launder tainted value.

Evidence includes records of parallel investigations, first information reports, regulatory show-cause or attachment notices, and any forensic reports already in existence. The professional should flag such linkages to the Adjudicating Authority and preserve the underlying notices and correspondence.

Indicator 6, substantial related-party loans written off without basis

Large write-offs of loans owed to or by related parties, effected without independent justification, can conceal the extraction of value or the neutralisation of recoverable claims against connected persons. Related-party dealings are a recurring vector for abuse.

Evidence includes inter-company loan ledgers, board minutes authorising the write-offs, and related-party transaction disclosures in the debtor’s accounts. A forensic review that traces the underlying fund flows will often be necessary to establish whether the write-off had any commercial basis.

The table below maps each indicator to typical evidence, the threshold at which reasonable grounds may be said to arise, and the immediate step a practitioner should take.

The “reasonable grounds” standard, documenting the assessment

The phrase “reasonable grounds” is the pivot of the entire exercise. It is an objective standard: it requires facts capable of independent verification plus reasonable inferences drawn from those facts. It is not satisfied by suspicion alone, nor does it require proof to the criminal or even civil standard. The professional is expected to reach a considered, evidence-based view that a reasonable practitioner in the same position would also reach.

Because the assessment may later be scrutinised, by the Adjudicating Authority, by affected parties, and potentially by the regulator itself, contemporaneous documentation is indispensable. The professional should create and maintain an internal memorandum that records the following:

• The trigger. Which indicator or combination of indicators first prompted the assessment, and when.
• The facts. The objective, verifiable facts identified, each cross-referenced to its source document.
• The inferences. The reasonable inferences drawn from those facts, with the reasoning stated.
• The material relied upon. An index of the documents, records and statements considered, with their provenance.
• The chain of custody. How each document was obtained and secured, so its integrity can be demonstrated.
• The conclusion. Whether reasonable grounds were found to exist, and the decision to file or not to file.

Witness statements, internal sign-offs and dated entries strengthen the record. Where the process runs through a firm or a team, an internal review and a documented approval of the decision to file provide a defensible audit trail. The objective is that, if the assessment is later challenged, the professional can show that the conclusion was reached carefully, in good faith and on a proper evidential foundation.

Drafting and filing the application to the NCLT

Once reasonable grounds are established, the professional should apply to the Adjudicating Authority. The National Company Law Tribunal is the forum, and the application should follow the tribunal’s procedural rules on form, verification and service. A well-constructed application makes the professional’s reasoning transparent and gives the tribunal what it needs to act.

A robust application bundle will typically include:

1. Jurisdiction and parties. The relevant NCLT bench, the corporate debtor, the applicant insolvency professional in his or her capacity, and the affected parties.
2. The relief sought. A clear statement of what the tribunal is asked to do, for example, to examine the conduct of the process, to grant appropriate directions, or to permit further steps.
3. The indicators relied upon. Each red-flag indicator engaged, stated plainly and tied to the evidence.
4. A chronology. A dated sequence of the material events, from admission through to the point of the application.
5. The material relied upon. An indexed set of exhibits, assignment documents, ROC extracts, valuations, expressions of interest and requests for resolution plans, communications, regulator notices and forensic reports.
6. The affidavit of the insolvency professional. Verifying the facts and exhibiting the internal assessment where appropriate.
7. Service and sealing. Compliance with service requirements and any sealing appropriate to sensitive material.

Because timelines in a CIRP are compressed, the application should be prepared and filed promptly once reasonable grounds are formed; delay both prejudices the estate and weakens the professional’s position. It is prudent to instruct counsel to settle the application, given the procedural precision the tribunal expects and the consequences of the relief sought.

Interaction with avoidance transactions under sections 43–51 of the IBC

Reporting misuse does not stand alone. Sections 43 to 51 of the IBC create the avoidance regime, the framework under which preferential, undervalued, extortionate and certain other transactions can be reversed. Several of the indicators overlap directly with avoidable-transaction territory. Related-party write-offs, disproportionate realisations and value transfers within debtor clusters are precisely the conduct the avoidance provisions are designed to unwind.

The two routes are complementary, not alternatives. An application highlighting misuse addresses the conduct of the process itself and invites the tribunal to scrutinise it; an avoidance application under sections 43 to 51 seeks to recover or reverse specific transactions. Where the facts support both, the professional should ordinarily flag the avoidance issues and, in parallel, prepare the separate avoidance proceedings on their own footing. Raising misuse does not discharge or replace the professional’s distinct responsibility to pursue avoidable transactions.

Evidence preservation is the common thread. The same ledgers, board minutes and forensic tracing that support a misuse report will underpin any avoidance claim, so securing that material early serves both purposes. Practitioners should keep in view the appellate jurisprudence of the National Company Law Appellate Tribunal (NCLAT) and the principles laid down by the Supreme Court of India on abuse of process and the duties of insolvency professionals, which inform how tribunals weigh both categories of application.

A practical workflow for insolvency professionals and creditors

To operationalise these responsibilities, firms and monitoring groups should build screening into their standard case management rather than treating it as an ad hoc exercise. The professionals best placed to comply are those who have a systematic process already running. A practical twelve-point workflow follows:

1. Screen every new case at intake against the indicators.
2. Score each indicator present and record the basis for the score.
3. Retrieve the creditor register and analyse concentration and any assignments.
4. Pull ROC filings and map promoter, director and address linkages.
5. Review the marketing effort and the competitive participation in the process.
6. Check for missing or anomalous valuations and ensure registered valuers are appointed where required.
7. Search for parallel investigations before other regulators or agencies.
8. Examine related-party ledgers, board minutes and disclosures for unjustified write-offs.
9. Set an escalation trigger, a defined point at which the accumulated indicators require formal assessment.
10. Prepare and sign off the internal memorandum documenting reasonable grounds.
11. Preserve evidence: secure documents, capture digital records with proper chain of custody, and take custodial statements where appropriate.
12. File an application at the NCLT where warranted, and maintain a communications log throughout.

Creditors have a role too. Financial and operational creditors who observe the same red flags should bring their concerns and supporting material to the professional promptly, so that the assessment can be made with the fullest possible information.

Cross-jurisdictional considerations, common-law parallels

India’s approach has resonance beyond its borders. Other common-law jurisdictions share doctrinal roots on abuse of process and the fiduciary character of office-holder duties, even where their statutory insolvency frameworks differ in detail. For cross-border groups, a misuse pattern detected in an Indian CIRP may have counterparts in connected entities elsewhere, and creditor committees operating across jurisdictions should coordinate their information-gathering. Where a group spans multiple legal systems, local counsel in each jurisdiction should be engaged to determine whether a comparable reporting duty exists or can be invoked, and to ensure that evidence gathered in one forum is usable in another.

Conclusion, next steps for insolvency professionals and creditors

Reporting misuse of the CIRP is best treated as a matter of duty, not mere discretion, and the practical burden falls on those who conduct and fund insolvency processes. The immediate priorities are clear: screen current and incoming cases against the indicators, embed the workflow into intake and case management, document the reasonable-grounds assessment contemporaneously, preserve evidence with a defensible chain of custody, and file an application at the NCLT where the threshold is met. Where the facts also engage the avoidance regime under sections 43 to 51, pursue those claims in parallel. Given the procedural precision required and the professional exposure at stake, practitioners should consult counsel before filing.

This article is provided for informational purposes and is not a substitute for advice on a specific matter.

Sources

1. Insolvency and Bankruptcy Board of India (IBBI), circulars and press
2. Insolvency and Bankruptcy Code, 2016, India Code legislative repository
3. Ministry of Corporate Affairs (MCA)
4. National Company Law Tribunal (NCLT)
5. National Company Law Appellate Tribunal (NCLAT)
6. Supreme Court of India, judgments repository
7. Bar Council of India
8. Indian Law Institute