IBBI’s 6 IBC Misuse Red Flags: What Businesses Should Know

Overview: The Insolvency and Bankruptcy Board of India (IBBI) has identified six indicators that may warrant closer examination when the Insolvency and Bankruptcy Code, 2016 (IBC) is potentially used for purposes beyond genuine insolvency resolution or liquidation.

IBBI has highlighted concerns around creditor structures, connected entities, resolution processes, valuations, regulatory proceedings and related-party transactions, through Circular No. IBBI/CIRP/105/2026 dated September 9, 2026. The guidance reinforces the importance of due diligence, transaction transparency and proper corporate records.

Corporate insolvency proceedings involve significant financial and operational consequences. Unusual creditor arrangements, connected companies, overlapping resolution processes or unexplained transactions can therefore require closer examination.

IBBI’s guidance gives Insolvency Professionals (IPs) a set of indicators for further enquiry. Importantly, these indicators are not conclusive proof of misuse and must be assessed in the context of the circumstances.

Why IBBI Highlighted These Red Flags

IBBI said it had received information from law-enforcement and regulatory agencies indicating that, in certain cases, Insolvency and Bankruptcy Code, 2016, (IBC) framework may be used for purposes other than resolution or liquidation.

The circular refers to possible situations involving mitigation of tax liabilities, closure or merger without regulatory scrutiny, investigations, prosecution or penalties, and monetisation or ring-fencing of assets.

The guidance applies to Registered Insolvency Professionals, Insolvency Professional Entities and Insolvency Professional Agencies.

Six IBC Misuse Red Flags

IBBI has described these as illustrative and non-exhaustive indicators:

• Single-creditor dominance: A recent debt assignment or Corporate Insolvency Resolution Process (CIRP) initiation by a single creditor, other than a scheduled bank or public financial institution, followed by that creditor gaining dominance in the Committee of Creditors (CoC).
• Connected companies entering CIRP: Corporate debtors with common promoters, directors, addresses or inter-lending arrangements entering CIRP within a proximate timeframe, particularly with overlapping CoC compositions.
• Limited resolution competition: Minimal competitive participation or repeated appearance of the same resolution applicant across connected corporate debtors.
• Disproportionate creditor realisations: Creditor realisations grossly disproportionate to admitted claims without support from a proper valuation exercise.
• Fraud-related proceedings: A corporate debtor or its group being linked to an order or proceeding of another regulator, enforcement agency or investigating agency concerning fraud.
• Unexplained group transactions: Significant loans, advances or investments involving related or group entities without adequate basis, including specified circumstances involving absence of operations or amounts written off or shown as doubtful/NIL.

Does a Red Flag Mean IBC Misuse?

No, not by itself. IBBI has clarified that the indicators are illustrative and non-exhaustive. An IP must examine available records, conduct further enquiry where required and assess the circumstances holistically.

Where an IP forms a view on reasonable grounds that the insolvency process may serve a fraudulent or malicious purpose unrelated to resolution or liquidation, the Insolvency Professional is required to approach the Adjudicating Authority with the relevant facts, material and reasons.

What Does This Mean for Businesses?

The guidance makes proper documentation particularly important during insolvency or restructuring. Businesses should maintain clear records relating to creditor arrangements, related-party transactions, group loans, valuations, corporate approvals and regulatory disclosures.

Transactions involving promoters, directors or group entities should have a clear commercial basis and appropriate supporting documents. Consistency between financial statements, corporate records and regulatory filings can also become important during CIRP or liquidation.

The presence of an indicator does not automatically establish misuse; genuine financial distress can also produce unusual commercial circumstances.

SetIndiaBiz Support

IBBI’s guidance reinforces the importance of maintaining organised corporate records before financial distress leads to formal insolvency proceedings.

SetIndiaBiz supports businesses with corporate documentation, compliance review, business structuring and regulatory requirements. Businesses facing financial stress can review their creditor arrangements, related-party transactions, valuation records and corporate documentation to identify potential gaps.

FAQs

IBBI’s September 2026 circular gives Insolvency Professionals six indicators that may call for further enquiry. For businesses, the practical priority is to maintain transparent transactions, consistent financial information and properly supported corporate records throughout the insolvency process.