Business & Finance
Enforcement Directorate Targets IBC Frauds and Disproportionate Haircuts
The Enforcement Directorate (ED) has identified the re-examination of collusive resolution cases involving large haircuts, through which promoters re-acquire assets, as a primary focus area. This initiative follows the National Company Law Tribunal's (NCLT) August 25 order, which permitted Essel Group founder Subhash Chandra to settle personal insolvency proceedings for Rs 6.25 crore against admitted claims of Rs 22,006.57 crore. On September 1, a five-member special NCLT bench stayed this settlement order.
During its 36th Quarterly Conference of Zonal Officers (QCZO), held at the Indian Institute of Management, Bengaluru, on September 14-15, the ED outlined several core operational thrust areas. Topping the list was the unearthing of frauds under the Insolvency and Bankruptcy Code (IBC) and the Prevention of Money Laundering Act (PMLA). The agency noted recurring malpractices, including circumvention of Section 29A, inflation of related-party claims, manipulation of the Committee of Creditors, asset stripping, and artificially large haircuts that allow promoters to regain control of assets. Section 29A of the IBC prohibits defaulting promoters, wilful defaulters, and associated parties from bidding for their own companies during insolvency.
An ED official confirmed that numerous cases were discussed at the conference, highlighting concerns that companies sometimes use the IBC to avoid prosecution. The official noted instances where related parties have repurchased companies through the resolution process, effectively returning control to those who caused their financial distress. The Subhash Chandra settlement underscores broader concerns about significant haircuts under the IBC, where creditors often recover only a fraction of their dues.
Between FY2021-22 and FY2025-26, 1,077 cases were resolved under the IBC, with creditors recovering Rs 2.47 lakh crore, averaging approximately 29% of admitted claims. In FY26, the recovery rate decreased to 20%, marking a five-year low, down from 37% in FY25, 28% in FY24, 39% in FY23, and 24% in FY22.
The ED also analyzed the legal tension between the moratorium under Section 14 and the immunity under Section 32A of the IBC, and the attachment powers under the PMLA. Section 14 of the IBC imposes a moratorium, pausing legal actions by agencies, while Section 32A grants immunity to a company's assets after a new, unrelated buyer takes over. Various zones of the agency were instructed to identify red flags, obtain application copies related to preferential, undervalued, fraudulent, and extortionate transactions from resolution professionals, file intervention applications before the tribunal, and initiate independent PMLA investigations against masterminds.
The central debate surrounding the IBC revolves around whether its priority should be reviving distressed companies or maximizing creditor recovery. The government maintains that the Code's primary objective is resolution, not recovery. However, banks have expressed concerns regarding asset valuation, citing divergent methodologies, inadequate asset accounting, and valuation opacity as factors contributing to excessive haircuts.
Additionally, the agency emphasized coordination with state police and other law enforcement agencies, fast-tracking trials, aggressive pursuit of restitution for attached and confiscated assets to legitimate victims, and mandatory valuation of all confirmed attached properties by government-approved valuers. To expedite trials, the conference stressed identifying at least 10 high-profile cases in each region for trial conclusion and conviction within six to eight months. Cases pending over 10 years are to be placed in a dedicated monitoring register for monthly review by the zonal head, with plea bargaining and non-conviction-based confiscation considered in eligible cases.
During the conference, the ED noted a case where its intervention before the NCLT led to the recall of an order initiating the corporate insolvency resolution process of a company. Sources indicated this case involved Alchemist Limited, founded by former Rajya Sabha MP KD Singh. The ED was investigating money laundering charges in an alleged Rs 1,842-crore public financial scandal related to the company when an insolvency application under Section 9 of the IBC was filed by an operational creditor, Sai Tech Medicare Pvt Ltd, to initiate a Corporate Insolvency Resolution Process (CIRP) for Alchemist Limited. Following the ED's intervention, the NCLT terminated the entire insolvency process on February 3 of this year. The NCLT's order stated that the ED submitted that the “Alchemist Group, under a well-hatched conspiracy, adopted the route of insolvency resolution through its group companies against its own companies and got its ex-employee appointed as RP (resolution professional) to receive the funds (proceeds of crime) through legal channel in their companies by misleading this Hon’ble Tribunal. They are misusing the insolvency resolution process to siphon off funds and to evade criminal liability under PMLA, 2002.” The NCLT concluded that the CIRP had not been initiated or conducted for genuine insolvency resolution, considering the allegations, confirmed PMLA attachments, the dominance of accused group entities in the Committee of Creditors, prima facie fund layering, and the risk of misusing insolvency immunity.