ED Flags Bankruptcy Code Frauds and Large Haircuts

Key Highlights & Summary

 • Focus on IBC Frauds: The Enforcement Directorate (ED) identified frauds under the Insolvency and Bankruptcy Code (IBC) and disproportionately large haircuts as a primary operational thrust area. 

• Systemic Malpractices: Key issues flagged include circumvention of Section 29A, manipulation of the Committee of Creditors (CoC), inflation of related-party claims, asset stripping, and promoters re-acquiring assets via collusive resolutions. 

• Declining Creditor Recovery: Average recovery rates under IBC dropped from 37% in FY25 to 20% in FY26, raising concerns that companies use the IBC process to escape criminal prosecution. 

 • Subhash Chandra Settlement Case: The NCLT approved a repayment plan for Essel Group founder Subhash Chandra offering ₹6.25 crore against admitted claims of ₹22,006.57 crore, which was subsequently stayed by a five-member special bench.

 • Inter-Agency Coordination Directives: ED zonal offices were directed to file intervention applications before NCLT, identify fraudulent transactions, and initiate independent PMLA investigations against masterminds. 

• Valuation Discrepancies: Banks expressed concern over opaque asset valuation methodologies, prompting ED to demand mandatory valuation of confirmed attached properties by government-approved valuers. 

Essential Definitions

 • Haircut: The percentage reduction or write-off taken by financial creditors on the total outstanding debt during an insolvency resolution process.

 • Moratorium: A legal freeze under Section 14 of the IBC that temporarily halts all judicial proceedings, asset transfers, and debt recovery enforcement against a corporate debtor. 

• Section 29A (IBC): A statutory provision that debars wilful defaulters, defaulting promoters, and connected/related parties from bidding as resolution applicants for distressed assets.

 Legal and Constitutional Framework

 • Insolvency and Bankruptcy Code (IBC), 2016: Sections 14 (Moratorium), 29A (Ineligibility of Resolution Applicants), and 32A (Immunity to Successful Resolution Applicants from past offences). 

• Prevention of Money Laundering Act (PMLA), 2002: Empowers the ED to search, seize, attach, and confiscate properties derived from scheduled offences and proceeds of crime.

 • Constitutional Dimensions: Conflicts arise between the statutory immunity under Section 32A of the IBC and the State\'s duty to enforce criminal law and economic order under Article 39(b) and Article 39(c) of the Directive Principles of State Policy. 

Conclusion The ED\'s scrutiny over collusive insolvency resolutions highlights a growing legal friction between financial debt resolution under the IBC and criminal prosecution under the PMLA. Ensuring transparent asset valuation and plugging loopholes around promoter re-entry are critical to preventing the misuse of bankruptcy channels for money laundering. 

UPSC Relevance

 • GS Paper III (Economy): Indian Economy, Insolvency and Bankruptcy Code (IBC) reforms, Banking Sector non-performing assets (NPAs), and Corporate Restructuring.

 • GS Paper III (Internal Security): Money laundering challenges, Enforcement Directorate (ED) mandate, Prevention of Money Laundering Act (PMLA), and financial crime enforcement.