IBC Faces Fresh Scrutiny Over Insolvency Misuse

ED Flags Risks in Insolvency Proceedings

IBC Faces Fresh Scrutiny Over Insolvency Misuse: The Enforcement Directorate (ED) has made detection of fraud and malpractice in proceedings under the Insolvency and Bankruptcy Code (IBC), 2016 an operational priority. The move comes amid concerns that insolvency mechanisms may be manipulated to help promoters or related parties regain distressed assets at artificially low valuations.

Such practices can reduce the amount ultimately recovered by legitimate creditors and undermine the objective of resolving financially stressed businesses.

Subhash Chandra Case Raises Concern

The issue gained prominence after the National Company Law Tribunal (NCLT) passed a settlement order on 25 August 2026 in the Subhash Chandra case. Personal insolvency proceedings were allowed to be settled for ₹6.25 crore, compared with admitted claims of ₹22,006.57 crore.

A five-member special bench of the NCLT subsequently stayed the order on 1 September 2026, bringing renewed attention to the issue of extremely low settlements and creditor protection.

Major IBC Fraud Risks

At its 36th Quarterly Conference of Zonal Officers in Bengaluru on 14–15 September 2026, the ED highlighted several potential vulnerabilities in insolvency proceedings involving the IBC and Prevention of Money Laundering Act (PMLA).

The identified risks include bypassing Section 29A, inflating related-party claims, manipulating the Committee of Creditors (CoC), stripping assets and creating excessively large haircuts. These practices can potentially enable connected parties to acquire valuable assets at substantially reduced prices.

Static GK fact: Section 29A of the IBC establishes categories of persons who are ineligible to submit resolution plans, including specified defaulting promoters and connected persons.

Deep Haircuts and Recovery

The extent of creditor recovery remains a major concern. Between FY2021-22 and FY2025-26, 1,077 cases were resolved, generating approximately ₹2.47 lakh crore for creditors, equal to an average recovery of about 29% of admitted claims.

Recovery varied sharply across the period, standing at 24% in FY22, 39% in FY23, 28% in FY24, 37% in FY25 and 20% in FY26. The FY26 figure was the lowest in the five-year period.

Banks have highlighted differences in valuation methods, incomplete asset accounting and limited transparency as factors that can contribute to excessive haircuts.

Resolution Versus Recovery

The IBC is designed primarily for resolution and revival of distressed businesses, rather than functioning solely as a debt-recovery mechanism. Keeping a viable enterprise operational can protect employment, productive capacity and economic value.

However, very low recoveries can raise concerns over value destruction and creditor protection. The policy challenge is therefore to combine timely resolution with value maximisation and safeguards against abuse.

IBC and PMLA Interface

The ED has also examined the relationship between key IBC provisions and the PMLA. Section 14 provides a moratorium during the insolvency process, while Section 32A provides specified protections after a qualifying change of control to an unrelated successful resolution applicant.

The PMLA, meanwhile, enables authorities to attach and confiscate proceeds of crime. This creates potential legal tensions when assets involved in insolvency proceedings are also linked to alleged money laundering.

Static GK Tip: The IBC was enacted in 2016 to consolidate India’s insolvency framework and establish a time-bound process for resolving insolvency.

ED Enforcement Measures

The ED has directed regional offices to identify red flags and obtain information concerning preferential, undervalued, fraudulent and extortionate transactions from Resolution Professionals.

It will also consider intervention before tribunals, initiate independent PMLA investigations, coordinate with State police and pursue restitution of attached or confiscated assets to legitimate victims.

Alchemist Limited Case

The ED cited Alchemist Limited as a case study where its intervention contributed to termination of the insolvency process. The matter involved an alleged ₹1,842-crore financial scandal and money-laundering investigation.

The NCLT noted prima facie concerns including alleged fund layering, domination of the CoC by accused group entities, possible misuse of the insolvency mechanism and potential exploitation of Section 32A protections.

Way Forward

Effective enforcement must protect the IBC’s core objective of time-bound resolution and revival of viable businesses. Stronger transparency, credible valuation, creditor safeguards and coordination between insolvency and enforcement authorities can help prevent misuse while preserving legitimate resolution proceedings.

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IBC Faces Fresh Scrutiny Over Insolvency Misuse: