The Enforcement Directorate (ED) has decided to examine cases under the Insolvency and Bankruptcy Code (IBC) involving disproportionately high haircuts, particularly where promoters regain control of assets after insolvency proceedings.
According to a report by NDTV Profit, an ED release showed that the agency has identified possible concerns such as circumvention of Section 29A of the IBC, manipulation of the Committee of Creditors (CoC), inflated related-party claims and stripping of assets.
The agency plans to intervene before tribunals in suitable cases and initiate separate investigations under the Prevention of Money Laundering Act (PMLA).
ED and IBBI flag concerns over insolvency misuse
The ED has instructed officials to identify warning signs and collect information related to preferential, undervalued, fraudulent and extortionate transactions connected with insolvency cases.
The move follows concerns raised by the Insolvency and Bankruptcy Board of India (IBBI) regarding the possible misuse of the insolvency framework for purposes beyond resolution or liquidation.
In a circular issued on September 9, IBBI advised insolvency professionals to remain alert to situations where the insolvency process may be used for fraudulent or malicious objectives. The regulator said it had received inputs from law enforcement agencies and other regulatory bodies regarding such instances.
Regulators examine suspicious insolvency patterns
IBBI said misuse could include attempts to reduce tax liabilities, avoid investigations or penalties, and facilitate company closures or mergers without adequate regulatory oversight.
The regulator also highlighted asset monetisation or ring-fencing as possible indicators of improper use of insolvency proceedings.
Cases involving initiation of the Corporate Insolvency Resolution Process (CIRP) by a single creditor, or situations where debt is transferred to one creditor shortly before insolvency proceedings begin, have also been flagged for scrutiny.
IBBI pointed to other potential warning signs, including groups of related companies entering CIRP around the same period, common promoters or directors, shared addresses and inter-company lending arrangements.
The developments indicate increased regulatory focus on ensuring that the IBC framework remains focused on genuine insolvency resolution rather than being used for purposes unrelated to the law’s objectives.
