IBBI Flags Six Red Flags for Misuse of IBC; IPs Must Escalate Reasonable Suspicion to NCLT

The Insolvency and Bankruptcy Board of India (IBBI) has told insolvency professionals to sharpen their due-diligence response when circumstances suggest that the Insolvency and Bankruptcy Code, 2016 is being used for purposes unrelated to genuine insolvency resolution or liquidation. In Circular No. IBBI/CIRP/105/2026 dated September 9, 2026, the Board sets out a series of illustrative red flags and says that, where further enquiry gives an insolvency professional reasonable grounds to believe that a proceeding has been initiated for a fraudulent or malicious purpose, the professional should place the relevant facts and material before the Adjudicating Authority.

Why IBBI issued the circular

IBBI says it has received references from law-enforcement and regulatory agencies about cases in which the IBC framework may have been used to achieve objectives other than insolvency resolution or liquidation. The circular identifies examples such as attempts to mitigate tax liabilities, facilitate closure or merger without the scrutiny that would ordinarily apply, reduce the impact of investigations or prosecution, avoid penalties, or monetise or ring-fence assets.

The Board has not said that the presence of any one pattern automatically establishes abuse. Instead, it describes the indicators as illustrative and non-exhaustive and expressly notes that no single indicator, by itself, is conclusive. The practical message is that insolvency professionals are expected to recognise unusual patterns, test them against the available record and document the basis of any escalation.

Six red flags highlighted by IBBI

The circular lists six types of circumstances that may warrant closer scrutiny:

- Single-creditor dominance after a recent assignment or initiation: a CIRP is initiated by, or debt is assigned shortly before initiation to, a single creditor other than a scheduled bank or public financial institution, and that creditor dominates the committee of creditors.

- Connected corporate debtors entering CIRP close together: a cluster of corporate debtors with common promoters, addresses, directors or inter-lending arrangements enters CIRP in a proximate period, with overlapping committees of creditors.

- Weak competitive participation: the process attracts minimal competition or a common resolution applicant appears across connected corporate debtors.

- Disproportionate creditor realisation: creditor realisation is grossly disproportionate to admitted claims without proper valuation support.

- Parallel regulatory or enforcement exposure: the corporate debtor or its group is linked to a regulatory, enforcement, investigation or fraud proceeding.

- Questionable related or group-entity exposures: substantial loans, advances or investments exist with related or group entities despite little or no operating activity and are written off, shown as doubtful or valued at nil without an adequate basis.

What insolvency professionals are expected to do

IBBI's direction is not to treat the red-flag list as a mechanical checklist. When one or more indicators appear, the insolvency professional should make further enquiry using records and information available in the ordinary course of the assignment. That means the professional should connect the pattern to underlying transaction data, creditor relationships, valuation material, group-company linkages, claims, cash movements and any known regulatory or enforcement background before reaching a view.

The escalation threshold in the circular is important. If, after that enquiry, the insolvency professional has reasonable grounds to believe that the proceeding has been initiated for a fraudulent or malicious purpose, the professional shall apply to the Adjudicating Authority. The application should set out the relevant facts and materials, the indicators noticed and the reasons supporting the professional's view.

Practical implications for CAs, insolvency teams and finance functions

For insolvency professionals and advisers, the circular increases the importance of an auditable due-diligence trail. A file that merely records that a process technically complied with timelines may not be enough where the commercial pattern is unusual. The team should be able to show what it checked, what evidence it considered, why a particular relationship or valuation did or did not raise concern, and why escalation was or was not considered necessary.

For chartered accountants and finance professionals supporting a CIRP, the six indicators point to specific areas that may need deeper reconciliation: debt-assignment chronology, common-director and group-company relationships, inter-corporate loans and advances, valuation assumptions, impairment or write-off decisions, creditor recoveries and the factual status of any separate investigation or regulatory proceeding. Where several connected entities enter insolvency around the same time, group-level mapping becomes especially relevant.

The circular also matters for committees of creditors and prospective resolution applicants. It does not change the statutory voting framework, but it makes the surrounding fact pattern more important where creditor concentration, limited competition, connected entities or unusual recovery outcomes are present.

What professionals should do now

- Update CIRP due-diligence checklists to incorporate the six IBBI indicators without treating them as conclusive tests.

- Preserve evidence supporting valuations, write-offs, related-party balances and creditor recoveries.

- Map common promoters, directors, addresses, inter-lending and overlapping creditor relationships where connected entities are involved.

- Record the enquiries made after any red flag is identified and the basis for the conclusion reached.

- Where reasonable grounds of fraudulent or malicious initiation emerge, prepare the factual record for an application before the Adjudicating Authority rather than relying only on internal observations.

Takeaway: IBBI's September 9 circular turns unusual CIRP patterns into a more explicit due-diligence responsibility for insolvency professionals. The key change is not a presumption of wrongdoing, but an expectation that suspicious patterns are actively tested, documented and, where reasonable grounds exist, placed before the Adjudicating Authority.

Official source: View the official source document

Key takeaway

IBBI's September 9 circular identifies six illustrative red flags for possible misuse of the IBC framework and directs insolvency professionals to make further enquiries and approach the Adjudicating Authority when reasonable grounds of fraudulent or malicious initiation emerge.