IBBI’S Draft Guidance On Fraudulent Cirp Initiation: Right initiative — and Better Workable by Addressing Four Critical Gaps
Summary: The Insolvency and Bankruptcy Board of India (IBBI), through its Discussion Paper dated 14th August, 2026, has proposed a Circular directing registered Insolvency Professionals to exercise due diligence in identifying indicators of fraudulent or malicious initiation of CIRP under the Insolvency and Bankruptcy Code, 2016 and bring such indicators before the Adjudicating Authority under Section 60(5) read with Section 65. The supplied material welcomes the initiative but identifies four implementation gaps: absence of timelines, the position where an admission order has already addressed bona fides, lack of a safe harbour for good-faith subsequent discovery, and absence of protection for RPs whose Section 60(5)/65 applications are dismissed. It additionally proposes clarification that related due-diligence and application costs are CIRP costs and that stakeholders with a legitimate stake may approach the NCLT directly under Section 60(5). The material discusses Swiss Ribbons Pvt. Ltd. v. Union of India, Daryao v. State of U.P., Maneka Gandhi v. Union of India, Embassy Property Developments Pvt. Ltd. v. State of Karnataka and Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta.
I. THE REGULATORY CONTEXT
The Insolvency and Bankruptcy Board of India (IBBI) has, by its Discussion Paper dated 14th August, 2026, proposed to issue a Circular directing all registered Insolvency Professionals (IPs) to exercise due diligence in identifying indicators of fraudulent or malicious initiation of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), and to bring such indicators before the Adjudicating Authority (AA) by way of an application under Section 60(5) read with Section 65 of the Code.
The intent is unimpeachable. Section 65 of the IBC (Fraudulent or malicious initiation of proceedings) has remained a largely dormant provision since the Code’s enactment in 2016. The Supreme Court of India, in Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17, recognised that the CIRP is not intended as a recovery mechanism — it is a resolution framework for distressed assets. The misuse of CIRP to settle debts outside the ordinary recovery process, to mitigate tax liabilities, to close companies without regulatory scrutiny, or to ring-fence assets, strikes at the very foundation of the Code’s design.
IBBI’s decision to issue a Circular reminding IPs of their existing statutory duties under Sections 18, 19(2), 25(2)(j), and the Code of Conduct, and providing an illustrative list of indicators, is therefore a welcome regulatory initiative.
However, the Draft Circular, as presently worded, would benefit from certain additions to make its implementation effective and to protect the integrity of the ongoing CIRP. Specifically, it would be strengthened by prescribing timelines, adding procedural safeguards for the ongoing resolution process, clarifying the position where the admission order itself addresses the question of bona fides, providing a safe harbour for good-faith action followed by subsequent discovery, and — most critically — protecting the RP from retaliatory consequences where his Section 60(5)/65 application is dismissed at any judicial level.
These are not deficiencies of the framework — they are the kind of implementation gaps to make it more effective. This article attempts to surface them constructively, in the hope that the final Circular will be a more effectively workable framework.
II. GAP ONE: NO TIMELINE, UNLIMITED DISRUPTION RISK
The Problem
The Draft Circular is entirely silent on when the IP must complete his due diligence, form his opinion, and file his application — if warranted. It states, in paragraph 6, that the Circular applies to “all ongoing and future assignments,” but prescribes no outer limit for compliance.
This silence is not trivial. Consider the practical reality of a CIRP in its advanced stages. Once an Expression of Interest (EoI) has been published under Regulation 36A of the CIRP Regulations, 2016, and Resolution Applicants have commenced due diligence and prepared their Resolution Plans, the process is at its most commercially sensitive. At this stage, a Section 60(5)/65 application filed by the RP will:
- Necessarily place the Petitioning Creditor on notice and invite a contested hearing;
- Create uncertainty for Resolution Applicants who have already committed resources;
- Risk chilling participation in the resolution process; and
- Potentially cause the CIRP to breach the 330-day outer limit under Section 12 of the Code.
The IBC’s cardinal principle is time-bound resolution. A Circular that imposes a duty on the RP without specifying when that duty must be discharged is in direct tension with this principle.
The Comparison with Regulation 35A
The contrast with Regulation 35A of the CIRP Regulations, 2016 — which governs the RP’s duty to examine avoidance transactions under Sections 43, 45, 50, and 66 — is instructive. Regulation 35A prescribes specific timelines: the RP must form an opinion within 75 days of the CIRP commencement date and make a determination within 115 days. The Draft Circular imposes an analogous (and arguably more consequential) duty without any equivalent timeline, creating an anomalous and unworkable framework.
The Suggested Fix
The Circular should prescribe: (a) a stage-gate — the IP must complete due diligence and file his application, if warranted, not later than 45 days before the EoI date or within 60 days of appointment, whichever is earlier; (b) a cut-off — post-EoI applications require the leave of the AA; and (c) a no-automatic-stay clause — filing of the application shall not, by itself, stay the CIRP.
III. GAP TWO: THE ADMISSION ORDER PROBLEM
The Problem.
The Draft Circular does not address a scenario of profound practical importance: what happens when the NCLT’s order admitting the CIRP — the very foundation of the process — has itself addressed the question of the bona fides of initiation?
In many contested CIRP admissions, the corporate debtor raises, as a ground of objection, the allegation that the creditor is initiating proceedings maliciously or for collateral purposes. The AA considers and decides this question as part of the admission hearing. The admission order — a judicial order of the NCLT — is thus, in such cases, a decision on the very question that the RP would seek to re-agitate under Section 65.
An RP who files a Section 60(5)/65 application on the same factual matrix as was addressed in the admission order is, in effect, inviting a coordinate bench of the same Tribunal to sit in judgment over a prior order of admission. This is impermissible.
The Constitutional and Jurisprudential Basis
The broader doctrine of res judicata, constitutionally applied by the Supreme Court in Daryao v. State of U.P., AIR 1961 SC 1457 : (1962) 1 SCR 574, rests upon public policy, the finality of adjudication, and the rule of law. Its related doctrine of issue estoppel prevents parties from re-agitating an issue of fact, law, or mixed fact and law that was directly and necessarily in issue and was finally determined between them by a court of competent jurisdiction — subject to recognised exceptions, including pure questions of law, judgments rendered without jurisdiction, changes in the governing law, matters not actually or necessarily decided, and proceedings involving different parties or materially different facts.
The NCLT, though a creature of statute, exercises judicial power; its admission order, to the extent it addresses and decides the question of bona fides of initiation, binds the parties and privies to those proceedings. An RP who invites the AA — on the same facts, between the same parties — to re-examine a question it has already determined is not discharging a statutory duty; he is inviting the AA to sit in review over its own prior judicial order, which a coordinate bench cannot do.
An IP, as recognised by the Supreme Court in Swiss Ribbons, is an officer of the court. A regulatory circular cannot place him in the position of doing what judicial comity forbids.
The Suggested Fix
The Circular should clarify: (a) where the admission order has addressed bona fides, the RP shall not file a Section 65 application on the same facts; (b) new material not before the AA at admission shall be placed before the same bench by way of an IA; (c) where the admission order itself is challenged, the remedy lies before NCLAT under Section 61, not before the AA in a fresh Section 65 application.
IV. GAP THREE: THE SUBSEQUENT DISCOVERY PROBLEM — AND THE ROGUE STAKEHOLDER
The Problem
The Draft Circular imposes a mandatory duty of due diligence on the RP. But it provides no safe harbour for an RP who has conducted that due diligence in good faith, found nothing, proceeded with the CIRP, and is then confronted — by a stakeholder’s communication — with material suggesting fraudulent or malicious initiation that was not discernible at the time of his review.
This gap operates at multiple levels. The RP who gave a clean initial finding is exposed to IBBI disciplinary action on the ground that he “failed to identify” the indicators — even though they were not reasonably discoverable at the time. There is no structured channel for stakeholders to formally report indicators to the RP. And — most dangerously — a stakeholder who is aware of indicators at the outset of the CIRP can strategically withhold them, raise them only after the EoI has been published and Resolution Plans received, and thereby derail the resolution process with regulatory impunity.
The Suggested Fix
Three safeguards are required: (a) a safe harbour clause for the RP who conducted documented due diligence and found no indicators; (b) a structured, time-bound stakeholder reporting mechanism, with a consequence of non-admissibility for stakeholders who strategically withhold indicators; and (c) a stage-based disclosure mechanism — post-EoI discoveries go to the AA as a formal disclosure, with the AA deciding how to proceed, not the RP unilaterally.
V. GAP FOUR: THE CHILLING EFFECT — NO PROTECTION FOR THE RP WHOSE APPLICATION IS DISMISSED
The Problem — and Why It Is the Most Critical Gap
An IP who files a Section 60(5)/65 application in good faith — upon a genuine, documented review of indicators — takes a professional and regulatory risk that the Draft Circular does nothing to mitigate. If his application is dismissed by the NCLT, NCLAT, or the Supreme Court, he faces three distinct retaliatory threats.
Threat One: CoC Removal
Under Regulation 27 of the CIRP Regulations, 2016, the CoC can replace the RP by a vote of 66% of voting share. No reasons are required. The Petitioning Creditor — whose conduct was the subject of the Section 65 application — is, in many cases, a significant CoC member. A dismissal of the RP’s application hands that creditor the moral authority and the political ammunition to mobilise 66% of the CoC for the RP’s removal. This is the most foreseeable consequence of the Circular as drafted, and it will deter every IP in the country from discharging the duty the Circular purports to impose.
Threat Two: IBBI Disciplinary Action
A dismissal of the Section 65 application could be used by a disgruntled stakeholder to file a complaint before IBBI alleging that the RP filed a frivolous application, causing unnecessary delay and disruption. The RP would face proceedings under Section 220 read with the IBBI (Insolvency Professionals) Regulations, 2016 — potentially including suspension or cancellation of registration.
Threat Three: Civil Liability
If the filing caused a delay — resulting in the withdrawal of a Resolution Plan, loss to Resolution Applicants, or breach of the Section 12 timeline — affected parties may seek to hold the RP personally liable for consequential losses. There is no statutory immunity for the RP in such circumstances.
The Critical Distinction
A dismissal of the Section 65 application is NOT equivalent to a finding that the RP acted maliciously or without basis. The two outcomes are fundamentally different. An application may be dismissed on the ground of insufficient evidence, premature filing, procedural non-compliance, or because the AA takes a different view of the indicators. None of these outcomes implies bad faith on the part of the RP.
The Draft Circular, by failing to make this distinction, creates a framework in which the RP is incentivised to do nothing — because doing nothing carries no regulatory consequence, while acting on the Circular’s mandate and failing judicially carries the risk of removal, disciplinary action, and civil liability.
The Statutory and Jurisprudential Basis for Protection
The starting point is the IBC itself. Section 233 of the Code provides an express statutory immunity: no suit, prosecution, or other legal proceeding shall lie against an insolvency professional or liquidator for anything done or intended to be done in good faith under the Code or the rules or regulations made thereunder. An application filed under Section 60(5) read with Section 65, pursuant to the mandatory duty imposed by the Circular, is unambiguously something done under the Code. Section 233 is therefore directly attracted — and its protection must extend not only to civil suits but to disciplinary and regulatory proceedings that are, in substance, legal proceedings arising from the same act. The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17 recognised IPs as officers of the court functioning under judicial supervision. That characterisation reinforces the Section 233 protection: an officer of the court discharging a court-supervised statutory duty cannot be exposed to retaliatory removal or disciplinary action for an unfavourable judicial outcome, absent a specific finding of malice. The broader constitutional guarantee of procedural fairness under Article 21, as elaborated in Maneka Gandhi v. Union of India (1978) 1 SCC 248, also supports the position that no adverse action may be taken against a person for discharging a statutory duty without fair procedure and a finding of actual wrongdoing.
The Suggested Fix
Five protections are required: (a) immunity from CoC removal where the application was filed in good faith based on documented due diligence, absent a specific judicial finding of malice; (b) a requirement of the AA’s prior leave for any CoC removal resolution filed after a Section 65 application; (c) immunity from IBBI disciplinary action absent a judicial finding of malice; (d) malice — not error of judgment, not adverse outcome — as the sole disqualifying standard; and (e) a proposed amendment to Regulation 27 of the CIRP Regulations, inserting a proviso that no replacement of the RP shall occur while a Section 65 application is pending, without the leave of the AA.
VI. TWO ADDITIONAL CLARIFICATIONS THE CIRCULAR SHOULD MAKE
A. Costs of the RP’s Section 60(5)/65 Application Are CIRP Costs
A practical question that will inevitably arise — and on which the Circular is silent — is who bears the cost of the RP’s due diligence exercise and of the Section 60(5)/65 application itself. Legal fees, professional time, and the cost of instructing counsel before the NCLT are not trivial.
The answer, in the submission of the author, is clear: these costs are CIRP costs within the meaning of Section 5(13) of the IBC, which defines CIRP costs to include “the fees payable to any person whose services are availed of by the resolution professional” and amounts due to the RP for conducting the CIRP. An application under Section 60(5) read with Section 65 is not a personal action of the RP — it is a discharge of a statutory duty in the conduct of the CIRP. The costs of that discharge are accordingly CIRP costs, with priority in payment under Section 53(1)(a) of the Code.
The Circular should expressly clarify this position. The CoC must be made aware that these costs will be payable as CIRP costs — and appropriately, it is the CoC that must resolve to make such payment, since CIRP costs are ultimately borne by the corporate debtor’s estate and their approval governs the CIRP budget. Without this clarity, disputes will arise between the RP and the CoC over the allocation of these costs, adding a further layer of friction to an already sensitive process.
B. Any Stakeholder with a Legitimate Stake May Approach the NCLT Directly
The Draft Circular addresses itself exclusively to IPs and their duty to file applications under Section 60(5) read with Section 65. It does not remind stakeholders of a right they independently possess under the IBC — a right that is particularly important as a backstop where the RP, for whatever reason (including the retaliatory risks identified in this article), is unable or reluctant to act.
Section 60(5)(c) of the IBC vests the NCLT with jurisdiction over “any question of law or fact arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor.” The text of the provision is not restricted to applications by the RP alone. Courts have consistently entertained Section 60(5) applications from a wide range of parties with a stake in the CIRP proceedings.
On the question of who may invoke Section 65 via Section 60(5), the position in the case law — while not yet finally settled by the Supreme Court — points clearly in one direction: locus cannot be rejected merely on technical grounds where the applicant has a demonstrable stake in the proceedings. The NCLAT has held that applications by stakeholders raising allegations of fraudulent or malicious initiation deserve to be heard on merits, and that rejection solely on the ground of locus is unsustainable. Applications under Section 65 have been entertained from financial creditors (including homebuyers and allottees), majority shareholders, the corporate debtor itself, and other affected parties — each on the basis of their demonstrated connection to, and legitimate stake in, the CIRP proceedings.
The principle that emerges is this: any person with a legitimate stake in the CIRP — whether as a financial creditor, operational creditor, shareholder, allottee, resolution applicant, or other affected stakeholder — may approach the NCLT under Section 60(5) raising concerns of fraudulent or malicious initiation under Section 65, and the NCLT is empowered to entertain and decide such application. The right under Section 60(5) read with Section 65 is not the exclusive preserve of the RP.
It must be added, however, that Section 60(5) is not a provision of unlimited reach. The Supreme Court in Embassy Property Developments Pvt. Ltd. v. State of Karnataka (2020) 13 SCC 308 and Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209 has emphasised that the NCLT’s jurisdiction under Section 60(5) must have a nexus to the CIRP or liquidation proceedings — it does not convert the NCLT into a court of general civil jurisdiction. An applicant invoking Section 60(5) must therefore establish a legitimate stake in the proceedings and a direct connection between the relief sought and the CIRP.
The Circular should make this framework explicit. If any stakeholder with a legitimate stake has credible material indicating fraudulent or malicious initiation, it need not wait for the RP to act — it can approach the NCLT directly. This distributes the burden of vigilance across the ecosystem, addresses the chilling effect on RPs identified in this article, and strengthens the overall framework for combating CIRP misuse without placing the entire burden on a single officer of the process.
VII. COMPARATIVE JURISDICTIONAL PERSPECTIVE
The protections sought are not without precedent in comparative insolvency law. The Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 give certain protections to officeholders acting in good faith and within the limits of their statutory powers. UNCITRAL Legislative Guide on Insolvency Law (2004, updated 2013) recommends that insolvency representatives be protected from personal liability in respect of acts done in good faith in the exercise of their statutory functions. The Insolvency, Restructuring and Dissolution Act 2018 (IRDA) provides broad protection to judicial managers and liquidators in Singapore from personal liability in respect of any act done in good faith. U.S. Bankruptcy Code ( 11 U.S.C. ) provides similar protection to trustees acting within the scope of their statutory authority .
India’s IBC, modelled in part on these frameworks, would be an outlier among major insolvency jurisdictions if it compelled IPs to discharge a statutory duty while exposing them to removal, disciplinary action, and civil liability for the consequences of doing so.
VIII. CONCLUSION: A CIRCULAR THAT MUST BE COMPLETED
The IBBI’s initiative in issuing this Circular is the right one. The misuse of CIRP is a genuine problem that has engaged the attention of law enforcement, regulatory agencies, and the judiciary. IPs, by virtue of their unique access to the books and records of the corporate debtor, are indeed best positioned to identify such misuse at the earliest stage.
To fulfil its stated objective, the Circular would benefit from a set of complementary provisions: timelines that align with the stages of the CIRP; a clarification of the position where the admission order has addressed bona fides; a safe harbour for good-faith due diligence followed by subsequent discovery; and protections for the RP from retaliatory consequences where his Section 60(5)/65 application is dismissed — with malice, not an adverse judicial outcome, as the sole disqualifying standard. To these should be added a clarification that the costs of the RP’s due diligence and application are CIRP costs payable by the CoC, and a reminder to all stakeholders — including the CoC — of their independent right to approach the NCLT directly under Section 60(5) on any question arising in relation to the CIRP.
The Circular sets the right direction. These suggestions are offered to help it go the full distance — so that Section 65 moves from dormant provision to effective safeguard.
The six suggestions made in this article together address a single concern: that a well-intentioned circular, if it creates duties without timelines and without protections, may in practice deter the very conduct it seeks to encourage. With these additions, the Circular would give every IP in the country the confidence to discharge the duty IBBI is rightly seeking to enforce, and every stakeholder the assurance that the framework for combating CIRP misuse is complete, fair, and workable.
The author submits these suggestions in the spirit in which the Discussion Paper was issued — a collaborative effort between the regulator and the practising community to continuously strengthen the IBC framework.
