ED Targets Fraud and Misuse in IBC Cases

The Enforcement Directorate has intensified scrutiny of suspected fraud and manipulation under the Insolvency and Bankruptcy Code, focusing on cases involving disproportionately large haircuts, related-party transactions and instances where promoters may regain control of assets through the resolution process.

What Has the ED Asked Its Offices to Investigate?

ED Director Rahul Navin has directed zonal offices to initiate money laundering investigations against those involved in insolvency resolutions that appear prima facie dubious despite having been cleared by the National Company Law Tribunal.

The directions were issued during a three-day meeting of the agency’s special directors in Bengaluru.

Zonal offices have been asked to identify red flags, obtain copies of applications concerning preferential, undervalued, fraudulent and extortionate transactions from resolution professionals, file intervention applications before tribunals and initiate independent investigations under the Prevention of Money Laundering Act against alleged masterminds.

The issue was identified as one of the agency’s core operational thrust areas during its 356th Quarterly Conference of Zonal Officers in Bengaluru on September 14 and 15.

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What Malpractices Has the ED Flagged?

The ED has identified recurring alleged malpractices including circumvention of Section 29A of the IBC, inflation of related-party claims, manipulation of the Committee of Creditors, asset stripping and artificially large haircuts through which promoters may retain or regain control of assets.

Section 29A of the IBC prohibits defaulting promoters, wilful defaulters and connected or related parties from bidding for their own company during insolvency.

The agency is also examining alleged fraudulent re-acquisition of assets through the NCLT process and possible manipulation of voting through front entities forming a majority in a Committee of Creditors.

Why Are Large Haircuts Under Scrutiny?

The issue has attracted attention because creditors can recover only a fraction of their admitted claims in some insolvency resolutions.

One case involves Essel Group founder Subhash Chandra. An NCLT order on August 25 allowed Chandra to settle his personal insolvency proceedings by paying ₹6.25 crore against admitted claims of ₹22,006.57 crore. On September 1, a five-member special bench of the NCLT stayed the settlement order.

Creditors recovered ₹2.47 lakh crore from 1,077 cases resolved under the IBC between FY2021-22 and FY2025-26, against approved claims of about ₹9 lakh crore.

The recovery rate was 20% in FY26, compared with 37% in FY25, 28% in FY24, 39% in FY23 and 24% in FY22.

How Do the IBC and PMLA Interact?

The ED is examining the legal tension between the moratorium under Section 14 of the IBC and the immunity available under Section 32A on one side, and attachment powers under the PMLA on the other.

Section 14 of the IBC provides for a moratorium that pauses legal action, while Section 32A grants immunity to a company’s assets after a new and unrelated buyer successfully takes over.

An ED official said companies sometimes take shelter under the IBC to escape prosecution.

The official also said there have been instances where related parties bought back companies through the resolution process, effectively returning control to people responsible for the companies’ collapse.

What Other Steps Has the ED Ordered?

The agency has directed its units to coordinate with state police and other law enforcement agencies, fast-track trials and aggressively pursue the restitution of attached and confiscated assets to legitimate victims.

Mandatory valuation of all confirmed attached properties by government-approved valuers has also been sought.

Each region has been asked to identify at least 10 high-profile cases for completion of trial and conviction within six to eight months. Cases pending for more than 10 years are to be placed on a dedicated monitoring register for monthly review by the head of the zone.

Plea bargaining and non-conviction-based confiscation may also be considered in eligible cases.

What Happened in the Alchemist Case?

The ED highlighted a case in which it intervened before the NCLT, following which an order initiating the corporate insolvency resolution process was recalled.

The matter involved Alchemist Limited. While the ED was investigating alleged money laundering involving ₹1,842 crore, an insolvency application under Section 9 of the IBC was filed by operational creditor Sai Tech Medicare Pvt Ltd to take Alchemist Limited into a corporate insolvency resolution process.

Following the ED’s intervention, the NCLT terminated the insolvency process in February this year.

In its order, the NCLT recorded the ED’s submission that the Alchemist Group was misusing the IBC process to obtain immunity under Section 32A and frustrate proceedings under the PMLA.

The tribunal said it was satisfied that the corporate insolvency resolution process had not been initiated or conducted for the genuine purpose of insolvency resolution.

What Is the ED Trying to Prevent?

The ED’s wider focus is on preventing the insolvency process from being allegedly manipulated to enable promoters or related parties to regain assets after creditors accept substantial reductions in their claims.

Its directions cover suspected preferential and fraudulent transactions, related-party claims, asset stripping, creditor voting manipulation and other practices that may warrant investigation under the PMLA.

The420 Takeaway: “Insolvency Relief Cannot Become a Route Back to the Same Assets”

The scrutiny centres on a critical question in insolvency proceedings: who ultimately gains control of the assets after creditors accept substantial haircuts? The ED’s concerns over related parties, front entities, inflated claims and asset re-acquisition underline the importance of examining the complete ownership and financial trail behind a resolution rather than looking only at its final settlement value.

About the author — Ayesha Aayat writes on cybercrime, digital safety, and emerging online threats. Her work focuses on public awareness, legal clarity, and technology-driven risks.