Misuse of IBC Through Asset Undervaluation and Pre-Planned Auctions: Supreme Court Flags Systemic Abuse and Bank Collusion
- REEDLAW
- 9 hours ago
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REEDLAW Legal News Network reports: In a significant hearing highlighting systemic concerns within India’s insolvency framework, the Supreme Court expressed serious reservations over the increasing misuse of the Insolvency and Bankruptcy Code, 2016, particularly instances where corporate assets were allegedly grossly undervalued and transferred through pre-planned insolvency processes to family members or close associates of defaulting entities. Emphasising that the IBC mechanism cannot be permitted to become a tool for value erosion and regulatory evasion, the Court underscored the need to safeguard public money and preserve the integrity of the insolvency resolution process.
The Bench, while hearing a public interest challenge seeking a court-monitored probe into large-scale bank loan defaults, took note of allegations involving substantial haircuts in insolvency proceedings and raised concerns over potential collusion between corporate borrowers and lending institutions. The Court also examined the investigative approach adopted by enforcement agencies, observing that multiple loan transactions may warrant independent criminal scrutiny rather than consolidation into a single proceeding. Accordingly, the Central Bureau of Investigation and the Directorate of Enforcement were directed to place status reports before the Court, with liberty to submit such reports in sealed cover, as the matter was posted for further consideration.
The Supreme Court’s observations and directions in the present proceedings went far beyond routine procedural supervision and reflected grave constitutional and systemic concerns regarding the misuse of the Insolvency and Bankruptcy Code, 2016. While hearing a public interest litigation seeking a Court-monitored investigation into alleged large-scale bank fraud involving companies of the Anil Dhirubhai Ambani Group, the Bench expressed serious disquiet over recurring patterns of asset undervaluation, pre-arranged auctions, and resolution outcomes benefiting family members or close associates of defaulting promoters.
The Chief Justice of India expressly noted that the IBC framework, conceived as a creditor-driven, value-maximising mechanism, appeared to be increasingly manipulated through voluntary insolvency filings, compromised valuation exercises, and controlled bidding processes, resulting in assets being transferred at a fraction of their real market value. The Court highlighted that such practices were not isolated but were being routinely observed, raising questions about the integrity of the insolvency resolution ecosystem, including the role of valuers, resolution professionals, and institutional creditors.
The Court also critically examined the investigative approach adopted by the Central Bureau of Investigation. It observed that the registration of a single FIR based solely on one bank’s complaint, while subsuming complaints from multiple other banks involving distinct loan transactions, prima facie failed to conform to settled procedural law, which treats each transaction giving rise to a cognisable offence as warranting independent registration. This lapse, in the Court’s view, diluted investigative accountability and risked obscuring individual acts of wrongdoing.
Significantly, the Bench underscored the necessity of probing possible collusion by bank officials, observing that large-scale loan exposure and drastic haircuts under the IBC regime could not be examined in isolation from the conduct of lending institutions. In this backdrop, the Court directed the CBI to investigate not only the corporate borrowers but also the role of bank officers, thereby reinforcing the principle that insolvency proceedings cannot be permitted to operate as a shield against criminal accountability.
The Court’s decision to call for status reports from the CBI and the Enforcement Directorate, with liberty to submit them in sealed cover, was thus rooted in the gravity of the allegations and the need for judicial oversight over complex, multi-agency investigations involving public money and systemic financial risk. These directions reflected the Court’s attempt to strike a balance between investigative confidentiality and constitutional responsibility to ensure that the IBC does not degenerate into an instrument for legitimising fraud.
This order is not merely procedural. It marks a judicial warning signal on systemic distortions within the IBC regime and reinforces that insolvency resolution cannot operate in isolation from criminal law, banking accountability, and public interest. The Court’s remarks are likely to influence future jurisprudence on IBC misuse, promoter backdoor entries, and lender accountability, and may catalyse regulatory and legislative recalibration.
Mr. Prashant Bhushan, AOR, Mr. Pranav Sachdeva, Ms. Neha Rathi and Mr. Sanyam Jain, Advocates, represented the Appellant.
Mr. Tushar Mehta, Solicitor General, Mr. Sudarshan Lamba, AOR, Mr. Arvind Kumar Sharma, AOR, Mr. Mukesh Kumar Maroria, AOR, Mr. Zoheb Hussain, Mr. Annam Venkatesh, Mr. Sairica Raju, Mr. Arkaj Kumar, Mr. Bhuvan Kapoor, Mr. Madhav Singhal, Ms. Anushka Gupta and Ms. Aakriti Mishra, Advocates, appeared for Respondent No. 1 to Respondent No. 3.
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