Red Flags or Fraud? Testing IBBI’s Indicators Against Section 65

Brief Summary: This article tests the Insolvency and Bankruptcy Board of India’s 14 August 2026 discussion paper on red flags for fraudulent or malicious CIRP initiation against the actual intent standard Section 65 of the IBC prescribes. It finds that only one of IBBI’s four indicator clusters, engineered creditor control, genuinely evidences the purpose Section 65 requires, while the remaining three measure financial distress, point to separate forms of misconduct, or remain too ambiguous to be used without further criteria, and it proposes a tiered way of applying the paper’s diagnostic list.

The Insolvency and Bankruptcy Board of India’s (IBBI) discussion paper of 14 August 2026 sets out an illustrative list of warning signs such as single-creditor-dominated Committees of Creditors, related-party write-offs without valuation basis, clustered group filings, and disproportionately low recoveries that insolvency professionals must weigh before reporting a case under Section 65. This raises a natural question: Do these indicators, as framed by IBBI, actually correspond to the fraudulent or malicious intent standard Section 65 requires, or do they mistake signs of poor governance or financial distress for evidence that Corporate Insolvency Resolution Process (CIRP) was initiated with a wrongful purpose? Section 65 carries real consequences: an adjudicating authority that accepts a finding of fraudulent or malicious initiation can penalise the applicant and unwind the process, while a false positive can needlessly derail a genuinely distressed company’s resolution and a false negative can let an engineered filing pass unchecked. Because the discussion paper asks insolvency professionals to draw this conclusion from a single, undifferentiated checklist, getting the underlying standard right matters both for the credibility of the insolvency framework and for the parties whose cases get labelled either way. This article examines each of IBBI’s four indicator clusters against the specific intent requirement Section 65 lays down, separates indicators that speak to purpose from those that merely describe financial condition or point to separate misconduct, and proposes a more calibrated way of using the paper’s diagnostic list without conflating governance failure with fraudulent intent.

What the Paper Actually Prescribes

The IBBI’s discussion paper directing insolvency professionals to conduct early due diligence to identify cases where the CIRP has been initiated for reasons unconnected to genuine insolvency resolution. They fall into four broad clusters: companies with negligible operations, revenue or tangible assets and persistently negative net worth; related-party loans, advances or investments written off or shown as doubtful without adequate documentary basis, along with qualified audit opinions on their recoverability; a Committee of Creditors formed by, or shortly assigned to, a single dominant creditor, or by clusters of companies with common promoters or directors filing together with overlapping Committees; and resolution outcomes yielding recovery grossly disproportionate to admitted claims, particularly where competition among resolution applicants was minimal.

Where an insolvency professional concludes, after weighing these indicators, that CIRP was initiated for a purpose other than resolution, the professional is directed to approach the adjudicating authority under Sections 60(5) and 65 of the Insolvency and Bankruptcy Code (IBC). The paper treats the four clusters as a single, undifferentiated checklist feeding into one legal conclusion that the process was fraudulent or malicious. This is the premise this paper tests.

What Section 65 Actually Requires

Section 65 does not penalise poor governance, asset stripping, or a bad outcome for creditors. It penalises initiating CIRP fraudulently or with malicious intent for a purpose other than resolution of insolvency. The element the provision turns on is purpose i.e., what the initiating party was trying to achieve by bringing on CIRP and not what state the corporate debtor happened to be in or how the process eventually turned out. A recent NCLT Ahmedabad ruling turned specifically on whether the applicant’s real objective was debt recovery rather than resolution, a finding about intent, reached by looking at what the applicant was actually trying to do and not at the target company’s financial condition.

The importance of the distinction is that it helps separate two different questions raised by the IBBI’s checklist into two different inquiries and the distinction is lost in the former. One, whether the company had failed the insolvency test itself to the extent of necessitating filing of CIRP and second, whether the entity filing for CIRP was doing so with some collateral benefit in mind, independent of the process of resolution.

Where the Indicators Fit and Where They Don’t

Measured against that purpose requirement, IBBI’s four clusters do not sit at the same distance from Section 65.

Shell companies and negative net worth.

The presence of a corporate debtor that is simply a shell corporation, having no actual operations whatsoever and always showing a negative net worth is another red flag that the firm was already in bad shape. By itself, it does not indicate the reason behind the initiation of the CIRP process. An actually troubled shell corporation could easily have been compelled to go into CIRP process for perfectly legitimate reasons, while a financially more sound corporation could be compelled into the same process for illegitimate reasons.

Related-party write-offs and qualified audit opinions.

These factors serve as clear signals of yet another form of misconduct, i.e., possible diversion or misrepresentation of related party dealings, covered in this case by such elements of the IBC as preferential treatment, under-valuing transactions and fraudulent dealing, as well as the separate fraud test under section 66. These have very little to do with any reasons for the filing of the CIRP itself. Previous write-off of a related party loan is not enough to prove that the person who caused the CIRP to be filed made use of that write-off rather than addressing any real problems.

Single creditor dominated Committees formed shortly before filing.

This is the indicator that most relates to the legislative issue. When debt is allotted to a particular creditor shortly before proceedings are initiated, and then this creditor has control over the Committee of Creditors, then there is direct evidence of manipulation, which can be viewed as a possible purpose for something other than resolution. Unlike the other three clusters, this is about the positioning of the initiating party.

Clustered group filings with overlapping Committees.

In truth, this factor is quite ambiguous, based on the criteria set forth in the paper. When group companies are promoted by the same individuals, they are often in actual financial distress and filing them collectively is the normal response to such distress. It could be that very same factual situation where the companies which are connected are filing in close proximity to one another that may signal either a fraudulent and coordinated behaviour, or simply normal and innocent activity. There is no criterion laid out in the IBBI paper for distinguishing between the two.

Disproportionately low recovery and minimal competition.

The existence of this indicator can be confirmed only when a resolution plan is approved. Hence, it can have no bearing on the due diligence process that is requested by the paper and, at best, is just as likely to be a sign of a badly conducted process or a low-value asset as it is to signify deliberate liquidation of liabilities. Outcome-oriented indicators of this type serve as poor indicators of the mental state of an applicant at the moment the CIRP is launched.

The Cost of Treating These as Equivalent

The IBBI’s paper requires insolvency professionals to consider all four clusters together and draw a conclusion regarding a fraudulent or malicious motive. The findings from the analysis above indicate that only one of the clusters, which is engineered creditor control, is directly related to this issue, while the others either constitute evidence of a different kind of misconduct altogether, evidence of financial conditions or are too vague to be of any use without additional criteria that is not provided in the paper. There are two risks involved with collapsing all four types of clusters together. There is a risk of false positives in a situation where a genuinely distressed set of corporations or a corporate debtor, whose related party transactions are poorly documented, could be declared as eligible for Section 65 treatment even though there is absolutely no evidence of collateral motive. There is also a risk of false negatives in a situation where creditor control is engineered in an efficient manner and the books of the corporation are in order and the debtor has only one filing.

Toward a Better-Fitted Framework

A better way of utilizing the information from the IBBI in itself would be to classify the four categories based on the evidence that they provide. Indicators that relate to engineered control and timing of debt assignment need to be considered the main basis for the Section 65 investigation, because they have a direct relationship with the motive for the process. Indicators that relate to the actual financial condition of the debtor need to be seen as filters on whether the process is actually required at all, but cannot be taken alone as the indicators of a fraudulent process. Indicators relating to related party transactions and audit qualifications need to be referred to the provisions that already exist for that, and only if a connection is established between the transactions and the process of initiating the CIRP, can there be an escalation to Section 65. Outcome-based indicators such as disproportionate recovery need to be considered at a later stage of investigation.

Conclusion

In its discussion paper, IBBI has rightly highlighted several patterns which need investigation in Indian insolvency law practice. However, the question that the section raises is whether the identified patterns have been tested against the standard set out in section 65. The test of purpose raised by section 65 requires that at least one of the indicators should clearly satisfy this test. Of the four clusters raised in the discussion paper, only the engineered creditor control cluster satisfies the said purpose. All others may either relate to another standard that has already been provided for in the IBC or to the situation of the debtor and not to the intention behind the initiation of insolvency proceedings. It is thus possible that the framework created on the basis of this discussion paper might require insolvency professionals to prove fraud on the basis of evidence which never intended to prove it. A more calibrated framework, one that treats engineered creditor control as the primary trigger, treats financial-condition indicators as threshold filters rather than proof of intent, routes related-party and audit-qualification red flags to the provisions already meant for them, and holds outcome-based indicators back as corroboration gathered later in the process, would let IBBI’s diagnostic work do what it is best suited for without stretching Section 65 beyond its statutory purpose. Until such refinement is built into the final circular, insolvency professionals would do well to treat only the creditor-control indicator as presumptively linked to intent, and to record, for the other clusters, the specific reasoning that connects them to purpose rather than motive by default, before invoking Section 65.

References

1. Insolvency and Bankruptcy Board of India, Discussion Paper – Guidance to Insolvency Professionals for Due Diligence to Identify Fraudulent or Malicious Initiation of Corporate Insolvency Resolution Process, and Recourse under Sections 60(5) and 65 of the Insolvency and Bankruptcy Code, 2016 (14 August 2026).

2. Insolvency and Bankruptcy Code, 2016, Sections 60(5), 65 and 66.

3. M/s Sumiran Foods Pvt. Ltd. v. Pankaj Events & Celebrations Pvt. Ltd., NCLT Ahmedabad Bench.

Sanya Bajpai Third Year Student, National Law University Odisha	Sneha Agarwal Third Year Student, National Law University Odisha