ED flags bankruptcy code frauds, ‘disproportionate’ haircuts as thrust areas

The Enforcement Directorate (ED) used its 36th Quarterly Conference of Zonal Officers, held at IIM Bengaluru on September 14‑15, to flag systematic frauds in IBC resolutions, especially cases where promoters secure disproportionately large haircuts to reacquire assets. The agency cited the recent NCLT order that permitted Essel Group founder Subhash Chandra to settle his personal insolvency for Rs 6.25 crore against admitted claims of Rs 22,006.57 crore, and the subsequent stay of that order on September 1, as a catalyst for its focus.

The ED’s statement listed several operational thrust areas, including circumvention of Section 29A, inflation of related‑party claims, manipulation of the Committee of Creditors, asset stripping and artificially large haircuts. Between FY 2021‑22 and FY 2025‑26, 1,077 IBC cases were resolved, yielding creditor recoveries of Rs 2.47 lakh crore – an average of about 29 % of admitted claims. Recovery rates fell to 20 % in FY 2026, down from 37 % in FY 2025 and 39 % in FY 2023. The ED also noted legal tensions between the moratorium under Section 14, the immunity provision of Section 32A, and the attachment powers under the PMLA.

The agency warned that misuse of the IBC allows distressed companies to shield promoters from prosecution, with related parties often buying back assets through resolution processes. ED officials directed zonal officers to flag red‑flag transactions, obtain relevant applications from resolution professionals, file intervention petitions before tribunals and launch independent PMLA investigations against alleged masterminds. The episode underscores the broader debate over whether the IBC should prioritize corporate revival or maximize creditor recovery, a concern echoed by banks over asset‑valuation methodologies.