Why in News?

• The Enforcement Directorate (ED) has identified frauds and malpractices in insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016 as a key operational priority.
• Its focus comes amid concerns that the insolvency process can sometimes be manipulated to enable promoters or related parties to regain control of distressed assets at artificially low valuations, causing large losses to creditors.

What’s in Today’s Article?

• The Subhash Chandra Case
• ED Identifies Key IBC Fraud Risks
• The Problem of Deep Haircuts
• Resolution vs Recovery - The Core Debate
• IBC–PMLA Legal Tensions
• ED’s Proposed Enforcement Strategy
• Conclusion

The Subhash Chandra Case:

• The issue gained prominence following the National Company Law Tribunal (NCLT)’s August 25 settlement order in the Subhash Chandra case.
• In this case, personal insolvency proceedings were allowed to be settled for ₹6.25 crore against admitted claims of ₹22,006.57 crore.
• A five-member NCLT special bench subsequently stayed the order on September 1.

ED Identifies Key IBC Fraud Risks:

• At its 36th Quarterly Conference of Zonal Officers, held in Bengaluru on September 14–15, the ED highlighted the need to uncover fraud under the IBC and Prevention of Money Laundering Act (PMLA).
• The agency identified recurring malpractices such as -
  • Circumvention of Section 29A of the IBC to enable ineligible promoters or connected parties to participate in resolution.
  • Inflation of related-party claims, potentially influencing the distribution of insolvency proceeds.
  • Manipulation of the Committee of Creditors (CoC).
  • Asset stripping before or during insolvency proceedings.
  • Artificially large haircuts, allowing promoters or related parties to regain control of assets at substantially reduced prices.
• Section 29A is intended to prevent defaulting promoters, wilful defaulters and specified connected persons from bidding for the assets of their own companies during insolvency.

The Problem of Deep Haircuts:

• A central concern is the extent to which creditors recover their dues through the IBC process.
• Between FY2021-22 and FY2025-26, 1,077 cases were resolved, with creditors recovering about ₹2.47 lakh crore, equivalent to an average recovery of around 29% of admitted claims.
• Recovery rates have also fluctuated significantly, for example, 24% in FY22; 39% in FY23; 28% in FY24; 37% in FY25; and 20% in FY26.
• The decline to 20% in FY26, the lowest in five years, has intensified concerns about asset valuation, transparency and creditor recovery.
• Banks have pointed to divergent valuation methodologies, inadequate accounting of assets and limited transparency as factors that may contribute to excessive haircuts.

Resolution vs Recovery - The Core Debate:

• The IBC's primary objective is resolution of distressed businesses rather than merely recovery of outstanding debt.
• Reviving a viable company as a going concern can preserve employment, productive capacity and economic value.
• However, excessively low recoveries raise questions about whether the process is adequately protecting creditors and preventing value destruction.
• The challenge is therefore to balance - Insolvency resolution → preservation of economic value → maximisation of creditor recovery → prevention of abuse of the process.

IBC–PMLA Legal Tensions:

• The ED has also examined the interaction between -
  • Section 14 of the IBC — provides a moratorium that temporarily restricts specified legal proceedings against the corporate debtor.
  • Section 32A of the IBC — provides specified immunity from prosecution for the corporate debtor and protection for its assets after a qualifying change of control to an unrelated successful resolution applicant.
  • PMLA — empowers authorities to attach and confiscate proceeds of crime.
• This creates a potential legal tension where an insolvency process could allegedly be used to shield assets connected with money laundering or frustrate criminal investigations.

ED’s Proposed Enforcement Strategy:

• The ED has directed its regional offices to -
  • Identify red flags in insolvency proceedings.
  • Obtain applications concerning preferential, undervalued, fraudulent and extortionate transactions from Resolution Professionals.
  • File intervention applications before tribunals wherever necessary.
  • Initiate independent PMLA investigations against the masterminds behind fraudulent transactions.
  • Improve coordination with State police and other enforcement agencies.
  • Pursue restitution of attached/confiscated assets to legitimate victims.
  • Ensure valuation of confirmed attached properties by government-approved valuers.
• Alchemist Limited case - A case study:
  • The ED also cited a case in which its intervention before the NCLT resulted in termination of the insolvency process.
  • While the ED was investigating an alleged ₹1,842-crore financial scandal and money-laundering offences, an operational creditor initiated insolvency proceedings against the company.
  • The NCLT subsequently terminated the CIRP, observing prima facie concerns regarding -
    • Domination of the CoC by accused group entities;
    • Alleged layering of funds;
    • Misuse of the insolvency mechanism;
    • Potential use of Section 32A immunity to frustrate PMLA proceedings; and
    • Lack of a genuine objective of insolvency resolution.
  • The case illustrates the risk of using the IBC as a legal channel for siphoning or legitimising illicit funds rather than as a genuine mechanism for corporate restructuring.

Conclusion: Enforcement must preserve the IBC’s fundamental objective of time-bound resolution and revival of viable businesses, without allowing criminal investigations to unnecessarily undermine legitimate insolvency proceedings.