Recently, there have been a few widely reported instances of improprieties during insolvency resolution processes involving prominent business groups which are subject of wider investigations for fraud. There have also been a few significant instances where the Insolvency and Bankruptcy Board of India (IBBI) has taken strict disciplinary actions against the concerned insolvency professionals (IPs), including cancellation and suspension of their respective registration.
Thus, there seems to be a renewed emphasis on scrutinising the steps leading up to approval of a resolution plan or liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC), as serious allegations have been levelled that the insolvency resolution processes have been utilised as a tool of tax avoidance and unfair corporate restructuring, including closure or merger of entities without regulatory scrutiny, mitigating investigation and prosecution risks, and monetising and ring-fencing assets. Therefore, it is likely that the framework for adjudication, especially at the stage of approval of plans, may undergo some re-alignment.
In these cases, there appears to be a growing perception that the commercial wisdom of the Committee of Creditors (CoC) is not an adequate check against the risk of being exposed to such improper actions. Hence, it is important to examine whether the supremacy accorded to the commercial wisdom of CoC still holds true, particularly when faced with allegations of misuse and abuse of the insolvency resolution process.
Renewed Approach by NCLAT at the stage of approval of Resolution Plan in Nimai Gautam Shah v. Raj Radhe Finance Ltd.
In Nimai Gautam Shah (RP of M/s Zep Infratech Ltd.) v. Raj Radhe Finance Ltd.[1], the National Company Law Appellate Tribunal (NCLAT) affirmed the rejection of a resolution plan which was unanimously approved by the CoC. This case serves as a reminder that while it is well settled that the commercial wisdom of the CoC is paramount under the scheme of IBC, the extent to which due compliance with prior steps will be assessed at the plan approval stage is difficult to predict as it is closely linked to the specific facts of a case.
Factual Background
In this case, the corporate insolvency resolution process (CIRP) of the corporate debtor, Zep Infratech Limited (Corporate Debtor/ CD), was initiated pursuant to an application under Section 7 of the IBC. The resolution plan submitted by the successful resolution applicant (SRA) was unanimously approved by the CoC and placed before the NCLT for approval.
The composition of the CoC is also relevant: the CoC comprised two unsecured financial creditors with an aggregate claim of about ₹15.61 Crore, while the aggregate claim of three operational creditors stood at ₹251.78 Crore of which 99.9% was the claim of the income tax department.
(i) Irregularities in the process prior to selection of resolution applicant
It is pertinent to note that no stakeholder raised any objection to the resolution plan or how the CIRP was conducted. However, upon independent scrutiny, the concerned National Company Law Tribunal (NCLT) declined approval of the resolution plan[2] on account of several irregularities, including the following:
● Material deficiencies were noted in disclosures regarding the assets of the CD. NCLT particularly noted the absence of disclosure and valuation of an office property of the CD in Ahmedabad, and the resultant incompleteness of the information memorandum. This was contrary to Regulation 36(2)(a) and (c) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), which requires the resolution professional (RP) to include all relevant details of tangible and immovable assets, including the geographical coordinates of fixed assets.
● The financial statements reflected a sharp erosion in the asset base of the CD, which were viewed as indicative of possible asset divestment without satisfactory explanation. For example, property, plant and equipment declined significantly by almost 40% in the three years prior to CIRP commencement. Similarly, inventories and intangible assets, along with cash balances, were either reduced to nil, or were substantially depleted. This was accompanied by a significant increase under the category of “other current assets” attributed to a slump sale, without adequate disclosure or clarity.
● No disclosure was provided with respect to substantial liabilities of the CD by short-term borrowings of over ₹443 Crore. Similarly, other significant creditor dues recorded in previous financial statements of more than ₹280 Crore were subsequently reduced to negligible levels without any corresponding disclosure or explanation.
● Despite circumstances warranting closer scrutiny, neither forensic audit of the CD’s affairs was undertaken, nor were any proceedings initiated in respect of preferential, undervalued, fraudulent or extortionate (PUFE) transactions.
● The valuation was found to be unreliable, as the reports of the two registered valuers showed extraordinary variance with respect to the value of the financial assets of the CD.
(ii) Deficiencies in the Resolution Plan
Further, the following findings were made particularly with respect to the resolution plan approved by the CoC:
● The financial capacity of the SRA was not satisfactorily demonstrated, as it was found that the SRA did not have adequate liquid funds to ensure implementation of the plan.
● The commercial feasibility and viability of the approved plan was not demonstrated, as required under Regulation 38(3) of CIRP Regulations. It was found that the plan did not provide for any funds to carry out the business of the CD to ensure its revival, and did not address the root cause of the financial distress.
● The plan provided for almost 46.44% recovery to the unsecured financial creditors, while allocating only about 0.20% of the admitted claims of the income tax department. Apart from these payouts, the plan did not provide for any capital infusion in the CD to address its revival.
Considering the nature of the above findings, NCLT held that the underlying purpose of the resolution plan was not to revive the CD, but to acquire the immovable property of the CD at a price below the fair market value and to gain the benefits of the clean slate doctrine through the IBC.
The NCLT also found that the CoC had failed to undertake adequate scrutiny of the resolution plan, particularly in relation to valuation and the treatment of significant claims and assets, thereby casting a doubt on its role in the present case and raising serious concerns over the integrity of the resolution process. Accordingly, holding that the CoC’s commercial decision could not be mechanically endorsed, the NCLT rejected the resolution plan and directed liquidation of the Corporate Debtor.
NCLAT’s Decision affirming the NCLT’s Findings
Separate appeals by the RP, CoC, and the SRA were preferred before the NCLAT on the grounds that the NCLT had overstepped its limited authority under Section 31 of IBC to interfere with the commercial wisdom of the CoC.
The NCLAT dismissed these appeals and upheld the decision of the NCLT. NCLAT also reiterated that NCLT’s jurisdiction is not limited to confirming the CoC’s decision to approve a resolution plan. It was clarified that the NCLT’s supervisory jurisdiction is required to ensure that the CIRP is conducted in accordance with the specified requirements under IBC such as to uphold its spirit and objectives.
While the NCLT ought to ordinarily refrain from intervening in the approval of a resolution plan, it is not precluded from assessing whether the process prior to the approval is conducted in a fair, transparent manner and in accordance with the scheme and objectives of the IBC. In this backdrop, the NCLAT set out the following three-pronged approach for considering approval of a resolution plan:
1. Statutory Compliance: The NCLT must ascertain that the CoC and the RP have complied with their statutory obligations during the course of CIRP towards making the process fair and transparent.
2. Examination of Material Irregularity: Where any irregularity is alleged or identified, the NCLT must examine whether such violation of statutory provisions constitutes a material irregularity.
3. Inquiry into Fraud or Misuse of IBC: Where there exist circumstances which indicate the possibility of fraud or misuse of IBC that undermines the integrity of the insolvency process, the NCLT is empowered to probe the same.
In applying the aforesaid framework in the present matter, the NCLAT clarified that the reasoning of the NCLT was not confined to statutory non-compliance or material irregularities, but was, in substance, referable to the third limb of the test, i.e., whether the facts indicated a misuse of the IBC framework affecting the integrity of the CIRP.
The NCLAT concurred with the NCLT that the following circumstances, when viewed cumulatively, justified the conclusions in this case:
● The financial statements reflected a significant and unexplained depletion of assets, coupled with a corresponding disappearance of substantial liabilities during the look-back period.
● Despite such material variations, no forensic or investigative exercise was undertaken to examine potential PUFE transactions.
● These issues were neither placed before nor meaningfully considered by the CoC, which also undermined the credibility of the information memorandum.
● The presence of substantial statutory liabilities, including income tax dues which would stand extinguished by operation of the clean slate doctrine, raised serious concerns as to the integrity of the CIRP.
● As this was a case where the CD was a corporate guarantor to the initiating financial creditor, disclosure/revision of status of the claim of the financial creditor was warranted in view of the claims made in the CIRP against the principal borrower. The NCLAT found that there is an implied obligation to disclose material developments across parallel CIRPs, in view of the requirements under Regulations 12A and 14 of the CIRP Regulations, requiring updating of claims upon realisation from any source, and corresponding verification and updating by the RP, respectively.
It was held that these factors, taken together, were sufficient to cast serious doubt on the integrity of the resolution process and the reliability of the information memorandum. It further emphasised that the absence of objections from stakeholders does not validate a process which is found to be fundamentally deficient.
The judgement emphasises that the statutory framework under IBC is not confined to procedural requirements alone but also embodies substantive values aimed at ensuring value maximisation of the corporate debtor. The NCLAT clarified that the deference accorded to the commercial wisdom of the CoC is predicated on decisions being taken based on complete, accurate and reliable information, and in a manner consistent with the objectives of IBC. In the absence of these foundational elements, the exercise of commercial wisdom was held to be vitiated.
Thus, notwithstanding the limited jurisdiction under Section 31 of the IBC, the NCLT is neither powerless nor precluded from taking cognisance of circumstances indicative of misuse of the statutory framework, and responding to the same in accordance with law. Therefore, once the resolution plan was found to be unsustainable on account of a fundamentally flawed resolution process, the order directing liquidation could not be faulted.
The NCLAT, however, cautioned that while the NCLT is empowered to intervene in such circumstances, such intervention must be founded on demonstrable facts and a reasoned analysis, and not on mere conjecture. This judgement marks an important development in delineating the interplay between the role of resolution professionals, vis-à-vis the commercial wisdom of the CoC and the Adjudicating Authority’s duty to ensure that the insolvency resolution process remains consistent with the statutory framework and underlying objectives of the IBC.
It is important to note that following this judgement, the IBBI had also scrutinised the conduct of the resolution professional in this CIRP in the disciplinary proceedings against him and had found adequate grounds to suspend the registration of the resolution professional for two years.[3]
IBBI Circular on Due Diligence by IPs regarding Misuse of IBC Framework
Taking note of the recent events, the IBBI issued a circular dated 9 September 2026[4] (Circular) calling upon the IPs to remain vigilant against circumstances indicating misuse of the insolvency process. The Circular is stated to be prompted by information received from enforcement and regulatory agencies regarding misuse of IBC. An illustrative list of such indicators for misuse of the IBC process as identified in the Circular is as follows:
1. A single creditor (other than a bank or a public financial institution) who dominates the CoC by virtue of initiating the CIRP, or by being assigned a significant portion of the debt shortly before initiation of CIRP.
2. A cluster of corporate debtors with common promoters, directors, addresses or inter-lending, taken into CIRP within a proximate timeframe with overlapping CoC composition.
3. Minimal competitive participation in the CIRP, or a common resolution applicant recurring across connected CIRPs.
4. Realisation to creditors which is grossly disproportionate to admitted claims, or unsupported by a proper valuation exercise.
5. Linkages of the corporate debtor or its group to any proceedings concerning fraud with other regulator, enforcement or investigative authorities.
6. Substantial loans, advances or investments to or from related/ group entities despite absence of operations, which have been written off or shown as doubtful/ nil without adequate basis.
The presence of all or any of the indicators would warrant closer examination, although the Circular clarifies that any of these indicators should not be treated as conclusive proof of misuse of the IBC process. Where the IP forms a view based on such examination that the CIRP or liquidation may be serving a fraudulent or malicious purpose, the IPs are expected to approach the Adjudicating Authority seeking appropriate directions.
The Circular appears to address some of the concerns highlighted in Nimai Gautam Shah by introducing an early-stage monitoring mechanism for identifying potential misuse of the IBC framework. Several indicators identified in the Circular are, in fact, circumstances which have been held to compromise the integrity of the process in Nimai Gautam Shah, including disproportionate realisations unsupported by proper valuation, unexplained transactions with related or group entities, linkages with fraud proceedings, and overlapping CIRPs involving connected entities.
Another positive change is that the Circular requires IPs to approach the NCLT for directions where the identified indicators warrant such directions. This mechanism of early identification and escalation to NCLT aims to reduce the possibility that any fundamentally flawed process reaches the stage of approval of resolution plan by CoC and enables the NCLT to correct the process at an early stage.
The Circular also assumes significance against the backdrop of heightened regulatory scrutiny of IPs. Recent IBBI data[5] indicates that the registrations of 207 IPs were cancelled during the quarter ended June 2026 for failure to remain “fit and proper”, as against only 28 such cancellations since the constitution of the IBBI in 2016. Such heightened regulatory scrutiny indicates increasing emphasis on the conduct of IPs to ensure the integrity of the process.
Conclusions and Takeaways
● The NCLT is not precluded from probing the integrity of the CIRP even where no stakeholder has raised objections: The NCLAT judgement in Nimai Gautam Shah seems to be a significant departure from the approach taken in cases of approval of a resolution plan. In most cases where there were no adverse parties raising any dispute with respect to the process followed during CIRP leading to the selection of the successful resolution applicant, there ordinarily would not have been any cause for interference from the NCLT or the NCLAT. Interestingly, in Nimai Gautam Shah, the initial findings of the NCLT were based on the NCLT’s own enquiry, and were not prompted by any challenge from any aggrieved party.
● The primacy of the CoC’s commercial wisdom remains intact, but operates within the boundaries of legality and procedural compliance: This judgement does not, however, dilute the principle of the primacy of the CoC’s commercial wisdom, which has been affirmed by the NCLAT in subsequent cases including in Vedanta Ltd. v. Bhuvan Madan (Resolution Professional of Jaiprakash Associates Ltd.)[6], where a challenge on the ground of material irregularity during the stage of selection of the successful resolution applicant was rejected. Rather, it clarifies that such primacy of the CoC’s decisions operates within the boundaries of legality and procedural compliance, and NCLT continues to retain a limited yet critical supervisory role at the stage of approval of the plan.
● Resolution professionals and CoC members must ensure heightened diligence, particularly in relation to valuation and treatment of assets and claims: Overall, the ruling emphasises that all stakeholders must approach the CIRP with heightened diligence, ensuring that both the substance of decisions and the integrity of the process withstand adjudicatory scrutiny. Particularly, the judgement, and the Circular issued thereafter, impose a heightened sense of responsibility on both the resolution professional and the CoC to ensure that the course taken during CIRP is procedurally fair, robust and transparent, particularly in relation to valuation and the treatment of assets and claims.
*Kaustav Som (Counsel),
**Arpit Lahotia (Associate).
[1] Judgement dated 21 April 2026 in Company Appeal (AT) (Ins) Nos.1061, 1043 and 946 of 2025 before NCLAT, New Delhi Bench.
[2] Order dated 23.06.2025 passed by National Company Law Tribunal, Ahmedabad in I.A. (Plan)/26(AHM) 2024 in C.P. (IB) No.69/7/NCLT/AHM/2023.
[3] Order dated 13 July 2026 in Case No.IBBI/DC/331/2026 before the IBBI Disciplinary Committee.
[4] IBBI Circular (Ref. No.: IBBI/CIRP/105/2026) dated 9 September 2026.
[5] IBBI Quarterly Newsletter (April-June 2026), Vol. 39.
[6] Judgement dated 4 May 2026 in Company Appeal (AT) (Ins.) Nos.552 & 553 of 2026 before NCLAT, New Delhi Bench.