Introduction
The Insolvency and Bankruptcy Board of India (IBBI) has issued Circular No. IBBI/CIRP/105/2026 dated 9 September 2026, directing insolvency professionals to exercise heightened vigilance in detecting potential IBC framework misuse. According to a report published on TaxGuru, the circular follows information received from law enforcement and regulatory agencies that, in certain cases, the IBC framework is being misused for purposes other than genuine insolvency resolution or liquidation of corporate debtors. The reported misuse includes mitigating tax liabilities, avoiding regulatory scrutiny, mitigating investigations, prosecution and penalties, and monetising or ring-fencing assets. This circular sets out illustrative indicators of potential misuse and requires insolvency professionals to make applications before the adjudicating authority when they form a reasonable view that the process serves a fraudulent or malicious purpose.
Key takeaways
- The circular addresses alleged IBC framework misuse for purposes such as tax mitigation, regulatory scrutiny avoidance, and asset ring-fencing.
- Insolvency professionals must watch for specific indicators, including debt assignments shortly before initiation, clustered CDs with common promoters, and disproportionate creditor realisations.
- The indicators are illustrative, not exhaustive, and none is conclusive by itself.
- IPs must undertake further enquiry on noticing indicators and apply to the adjudicating authority if they reasonably believe misuse exists.
- The circular is issued under section 196 of the Insolvency and Bankruptcy Code, 2016.
What Concerns Triggered the IBBI Circular on IBC Framework Misuse?
According to the TaxGuru report, the IBBI has received information from law enforcement and regulatory agencies that in certain cases, the framework under the Insolvency and Bankruptcy Code, 2016 (IBC) is being misused for purposes other than insolvency resolution or liquidation of the corporate debtor. The circular identifies several such instances, including mitigating tax liabilities, closure or merger of companies without regulatory scrutiny, mitigating investigations, prosecution and penalties under various statutes, and monetising and ring-fencing assets.
The circular explains that insolvency professionals, given their access to the books and records of the corporate debtor and the proceedings of the Committee of Creditors (CoC), are well placed to identify indicators of such misuse in the ordinary course of the insolvency process. The IBBI has therefore issued this guidance to ensure insolvency professionals remain vigilant to circumstances that may indicate fraudulent or malicious use of the insolvency framework. The circular does not suggest that all insolvency proceedings face misuse, but rather seeks to alert IPs to red flags warranting closer examination.
The circular’s issuance under section 196 of the IBC signals the Board’s regulatory intent to safeguard the integrity of the insolvency process and prevent abuse. The concern is that if the IBC framework is manipulated to serve collateral aims—such as escaping tax liabilities or shielding promoters from enforcement actions—it undermines the objectives of the Code and harms genuine creditors and stakeholders.
What Are the Indicators of IBC Framework Misuse?
According to the TaxGuru report, the circular sets out several illustrative indicators that insolvency professionals should be alert to. These include:
- CIRP initiated by, or debt assigned shortly before initiation to, a single creditor (other than a scheduled bank or a public financial institution as defined in section 2(72) of the Companies Act, 2013), who then dominates the CoC.
- A cluster of corporate debtors with common promoters, addresses, directors, or inter-lending, taken into CIRP within a proximate timeframe with overlapping CoC composition.
- Minimal competitive participation in the resolution process, or a common resolution applicant recurring across connected corporate debtors.
- Realisation to creditors grossly disproportionate to admitted claims, unsupported by a proper valuation exercise.
- Linkage of the corporate debtor or its group to an order or ongoing proceeding of another regulator, enforcement or investigating agency concerning fraud.
- Substantial loans, advances or investments to or from related or group entities despite absence of operations, written off or shown as doubtful or NIL without adequate basis.
The report emphasises that the indicators listed above are illustrative and not exhaustive. The circular clarifies that some of these indicators may also arise in cases involving genuine financial distress or in the ordinary course of commercial operations. They are intended to flag circumstances that warrant closer examination, and no indicator, by itself, should be treated as conclusive of misuse of the insolvency process. An indicator assumes significance when, upon a holistic and contextual assessment, it suggests that the corporate insolvency resolution process (CIRP) or liquidation may be serving a fraudulent or malicious purpose other than the resolution of insolvency or liquidation of the corporate debtor.
What Must Insolvency Professionals Do on Noticing These Indicators?
According to the TaxGuru report, on noticing one or more indicators, or other circumstances of a similar nature, the insolvency professional should undertake such further enquiry as may be warranted, based on the records and information available in the ordinary course of the CIRP or liquidation process. The circular does not require an IP to presume misuse, but to conduct appropriate due diligence where red flags arise.
Where, upon such review, the IP forms a view on reasonable grounds that the process may be serving a fraudulent or malicious purpose other than the resolution of insolvency or liquidation of the corporate debtor, the IP is required to make an application before the adjudicating authority. The report states that the application should set out the relevant facts and materials and seek such directions as the adjudicating authority may consider appropriate under the Code. Specifically, the application should identify the indicators noticed, the material relied upon by the IP, and the reasons for forming such a view.
This obligation to apply to the adjudicating authority places a positive duty on insolvency professionals to act where they form a reasonable belief of misuse. The circular does not prescribe the remedies or directions the adjudicating authority might grant, leaving that to the discretion of the authority under the IBC. However, by requiring an application setting out reasons and materials, the circular ensures that any allegation of misuse is formally documented and subject to judicial scrutiny. This mechanism is intended to protect the integrity of the insolvency process while safeguarding against frivolous allegations.
For context on related enforcement mechanisms, see SARFAESI Section 13(2): 60-Day Notice Guide and Leasehold Rights Under IBC: Key Protection During Moratorium.
How Does This Circular Impact Ongoing and Future Insolvency Proceedings?
According to the TaxGuru report, the circular is addressed to all registered insolvency professionals, all insolvency professional entities, and all insolvency professional agencies, and was circulated by way of publication on the IBBI website. The circular is dated 9 September 2026, and insolvency professionals are expected to apply its guidance immediately to ongoing and future proceedings.
The circular does not impose retrospective liability or require IPs to revisit closed cases. However, in any CIRP or liquidation currently under their charge, IPs are now expected to assess whether any of the indicators are present and to undertake further enquiry where appropriate. In future appointments, IPs will need to incorporate these checks into their standard due diligence processes.
The circular’s practical effect is to heighten the standard of vigilance expected of insolvency professionals. Given that IPs already owe statutory duties under the IBC to act independently and in the interests of all stakeholders, this circular reinforces those duties by spelling out specific red flags and a clear reporting mechanism. The circular may also encourage greater scrutiny by creditors, resolution applicants, and adjudicating authorities, as the indicators listed may be raised by any stakeholder who suspects misuse.
For broader corporate governance and compliance considerations, see Winding Up of a Company by a Tribunal and Essential Documents to Be Attached with a Development Agreement.
What this means in practice
For businesses undergoing or considering insolvency proceedings, the IBBI circular serves as a reminder that the IBC framework is designed solely for genuine insolvency resolution or liquidation, not for collateral purposes such as tax avoidance or shielding from regulatory enforcement. Corporate debtors, creditors, and promoters should ensure that any initiation of CIRP is bona fide and that the structure of the debt, the composition of the CoC, and the conduct of the resolution process can withstand scrutiny.
For insolvency professionals, the circular imposes a clear obligation to identify and report potential misuse. This means maintaining robust documentation of enquiries conducted, indicators noticed, and the basis for any view formed. IPs should be prepared to defend their decisions—whether to apply to the adjudicating authority or not—in the event of challenges by stakeholders or regulatory review.
Creditors and resolution applicants should be aware that transactions or structures that exhibit the indicators listed in the circular may attract enhanced scrutiny. Genuine creditors need not be concerned, but should ensure that their claims and conduct are transparent and well-documented.
FAQs
What is IBBI Circular No. IBBI/CIRP/105/2026 about?
The circular directs insolvency professionals to remain vigilant to potential misuse of the IBC framework for purposes such as mitigating tax liabilities, avoiding regulatory scrutiny, and ring-fencing assets. It lists illustrative indicators of misuse and requires IPs to apply to the adjudicating authority if they form a reasonable view that the process serves a fraudulent or malicious purpose.
What are the key indicators of IBC framework misuse?
Key indicators include CIRP initiated by a single creditor after a recent debt assignment, clusters of corporate debtors with common promoters or directors, minimal competitive participation, creditor realisations disproportionate to claims without proper valuation, links to fraud-related regulatory proceedings, and substantial related-party transactions despite absence of operations. These indicators are illustrative and not exhaustive.
What must an insolvency professional do on noticing indicators of misuse?
On noticing indicators, the insolvency professional should undertake further enquiry based on available records. If, after holistic assessment, the IP forms a reasonable view that the process may be serving a fraudulent or malicious purpose, the IP must make an application before the adjudicating authority, setting out the facts, materials, indicators noticed, and reasons for the view.
Does the circular apply to ongoing insolvency proceedings?
Yes, the circular is applicable immediately and insolvency professionals are expected to apply its guidance to ongoing CIRP and liquidation proceedings as well as future appointments. The circular does not, however, require retrospective review of closed cases or impose liability for past conduct compliant with the standards then applicable.
This article is based on a report published on TaxGuru regarding IBBI Circular No. IBBI/CIRP/105/2026 dated 9 September 2026. Readers should seek specific legal advice for their circumstances.
This article is for general information only and is not legal advice or an invitation to engage the firm. Laws and judgments change; please obtain specific legal advice before acting.
