IBBI Proposes Due-Diligence Guidance for Insolvency Professionals to Flag Fraudulent or Malicious CIRP Initiation

The Insolvency and Bankruptcy Board of India (IBBI) has released a discussion paper dated 14 August 2026 on guidance to Insolvency Professionals for due diligence to identify fraudulent or malicious initiation of the Corporate Insolvency Resolution Process (CIRP), with recourse under Sections 60(5) and 65 of the Insolvency and Bankruptcy Code, 2016 (IBC). The paper carries a draft circular and invites public comments up to 24 August 2026.

Why IBBI wants the guidance

IBBI says it has received information from law-enforcement agencies that CIRP has in some cases been used with mala fide intent. The paper lists the purposes seen: to settle debts outside the ordinary process of recovery, to mitigate tax and other statutory liabilities, to close or merge companies without regulatory scrutiny, to reduce the effect of pending or anticipated investigations, prosecution and penalties under other statutes, and to monetise or ring-fence assets.

The Board also observes that warning indicators of such abuse are not being consistently examined or escalated by Insolvency Professionals (IPs). In its words, this inconsistency has "in certain cases, delayed the invocation of section 65 notwithstanding the presence of discernible indicators of abuse."

Existing duties the draft relies on

The draft circular states that it is explanatory and does not create any new substantive obligation beyond what already flows from the Code and regulations. It links the guidance to these provisions:

• Section 18: the IP must collect all information relating to the assets, finances and operations of the corporate debtor.
• Section 19(2): the IP may seek directions from the Adjudicating Authority (AA) where the erstwhile management does not cooperate.
• Section 25(2)(j) with Regulation 35A of the CIRP Regulations, 2016: the resolution professional must form an opinion and record a determination on transactions covered by Sections 43, 45, 50 and 66.
• Section 60(5): the AA can decide any question of law or fact arising out of or in relation to the CIRP.
• Section 65(1): the AA may impose a penalty where CIRP has been initiated fraudulently or with malicious intent for a purpose other than resolution of insolvency or liquidation.
• Code of Conduct for IPs (clauses 1, 2, 3, 13 and 14 of the First Schedule to the IBBI (Insolvency Professionals) Regulations, 2016): integrity, objectivity and diligence, including in representations made before the AA.

Nine warning indicators

The draft gives an illustrative, non-exhaustive list of red flags:

1. No or negligible operations, revenue or tangible assets, with persistently negative net worth.
2. Substantial loans, advances or investments to or from related or group entities despite no operations, written off or shown as doubtful or nil without adequate basis.
3. Qualified audit opinions or emphasis of matter on recoverability of loans or investments, or on internal-control weaknesses around related-party exposures.
4. Links of the corporate debtor or its group to an order or ongoing proceeding of another regulator or investigating agency concerning diversion or fraudulent disbursement of funds.
5. CIRP initiated by, or debt assigned shortly before initiation to, a single creditor who then dominates the Committee of Creditors (CoC).
6. A cluster of corporate debtors with common promoters, addresses, directors or inter-lending admitted into CIRP within a short period, with overlapping CoC composition.
7. Valuers or auditors unable to verify asset classes for want of documents or cooperation.
8. Minimal competitive participation, or a common resolution applicant recurring across connected corporate debtors.
9. Realisation to creditors grossly disproportionate to admitted claims, without a proper valuation exercise.

What an IP would have to do

The draft describes a non-delegable duty on the IP to examine these indicators. On noticing them, the IP must review them in detail and form a considered opinion. Where the IP concludes that the process was initiated fraudulently or with malicious intent for a purpose other than resolution or liquidation, the IP must file an application before the AA under Section 60(5) read with Section 65 for suitable directions and penalty. This is in addition to any avoidance application warranted under Sections 43, 45, 50 or 66. The application goes to the AA, not to IBBI or the CoC. The draft proposes that the circular apply to all ongoing and future assignments from the date it takes effect.

Who could comment and how

IBBI invited comments from IPs, Insolvency Professional Agencies, Insolvency Professional Entities, CoC members, resolution applicants, financial and operational creditors, corporate debtors, personal guarantors, investors, legal practitioners and academics. Comments were to be filed through the "Public Comments" section of the IBBI website by selecting the discussion paper, entering name and email, choosing a stakeholder category and writing comments against the relevant paragraph of the draft. The last date was 24 August 2026.

For IPs handling live CIRPs, the practical step is to check current files against the nine indicators, document the review, and keep Regulation 35A determinations and any Section 65 application support ready, since the Board treats these as duties that already exist under the Code.

Updated on 27 September 2026: added the paper's date, the full list of legal provisions and nine warning indicators, the filing procedure for comments and the proposed applicability, all verified against the IBBI discussion paper.