IBC · Finin2min
IBBI Due Diligence Circular 2026: Preventing Misuse of the IBC Framework
Finin2min Editorial Desk · Reviewed by Ravi Sisodia · 2026-09-23
Finin2min 2-Minute Summary
IBBI published a circular on 9 September 2026 addressing due diligence by Insolvency Professionals in relation to misuse of the IBC framework. The practical message is that an IP cannot treat appointment or stakeholder assertions as sufficient proof of legitimacy. The professional should examine the transaction context, participants, records and red flags and document the basis on which the insolvency process is being conducted.
What the governing framework requires
- IBBI’s circular titled “Due diligence by Insolvency Professionals regarding misuse of IBC framework” is published on the Board’s circulars page with date 9 September 2026.
- An Insolvency Professional is a regulated fiduciary/process professional and should exercise independent professional judgment rather than act as a mechanical conduit for stakeholders.
- Due diligence should focus on whether the process, claims, transactions or proposed steps show indicators of abuse, collusion, sham arrangements or use of insolvency machinery for an improper objective.
- Findings and escalation should be documented contemporaneously because later scrutiny may focus on what the IP knew, what checks were made and why action was or was not taken.
- The circular should be read with the Code, applicable insolvency regulations, IBBI conduct framework and process-specific duties; it is not a substitute for those sources.
How to apply the rule in practice
A useful due-diligence file starts with corporate identity and authority: incorporation data, directors, shareholding, financial statements, creditors, security interests and key related parties. The IP can then compare that picture with the petition, claims and transactions presented in the process.
Red flags may arise when counterparties are connected, claim documents are created shortly before insolvency, valuations have unexplained gaps, assets move without commercial rationale, or a proposed resolution/liquidation step produces an unusual benefit for an insider. A red flag is not itself proof of misconduct; it is a reason to investigate and document.
The professional should also protect the committee and adjudicating process from information asymmetry. Material facts discovered through diligence should be placed before the appropriate stakeholder or authority in the manner required by law rather than retained only in the IP’s internal file.
Firms acting as IPs should convert the circular into a repeatable engagement protocol: onboarding checks, related-party mapping, claim verification standards, transaction-review triggers, escalation to legal advice and sign-off for high-risk findings.
The engagement team should record why a flagged relationship or transaction was cleared, not merely that it was reviewed. A short reasoning note linking the evidence to the conclusion is more useful than a tick mark because disciplinary or adjudicatory scrutiny may occur long after the team members have changed.
Worked example
An RP receives a large unsecured claim supported by an agreement executed six weeks before insolvency. The claimant and a promoter share a common director in another company. The correct response is not automatic rejection or acceptance. The RP should verify bank movement, accounting entries, board records, beneficial connections and commercial purpose, document the red flags and take the process step required by the evidence.
Common compliance mistakes
- Assuming an admitted insolvency application eliminates the need for independent diligence
- Treating KYC checks as the full scope of due diligence
- Failing to map related parties and common control
- Keeping red-flag findings outside the formal process record
- Using a generic checklist without tailoring it to the debtor’s business and transaction history
Practical action checklist
- Identify the exact regulatory text controlling IBBI Due Diligence Circular and preserve the version used for the decision.
- Create a dated process map for IBBI Due Diligence Circular showing owner, system record and supporting document at each stage.
- Recompute the decisive threshold or timeline for IBBI Due Diligence Circular from primary records rather than summaries.
- Escalate any unresolved judgement in IBBI Due Diligence Circular before the filing, transaction or board decision proceeds.
- Finish the IBBI Due Diligence Circular file with a reproducible audit trail and final acknowledgement where applicable.
Frequently asked questions
When was the IBBI circular published?
IBBI’s circular index records 9 September 2026.
Who is the main audience?
Insolvency Professionals and firms/support teams conducting IBC assignments.
Does a red flag prove misuse?
No. It triggers deeper verification and documentation.
Should claim verification include bank evidence?
Where relevant, yes. Documentary and financial evidence should support the asserted debt and transaction history.
Why is related-party mapping important?
Connections can affect claim treatment, voting, transaction review and the risk of collusive use of the process.
Can the IP rely entirely on legal opinions?
Legal advice may be important, but the IP retains professional duties and should understand the factual basis.
How should high-risk findings be handled?
Document them, investigate appropriately and place material matters before the relevant stakeholders or authority as required.
What should an IP firm change operationally?
Add structured red-flag, relationship, claim-evidence and escalation steps to its standard CIRP engagement file.
Primary sources
General reference only. Obtain professional advice.