Ghost Creditors and Phantom Claims under the IBC: A Structural Threat to the Integrity of the Committee of Creditors

[Apeksha is a student at National University of Study and Research in Law.]

The Insolvency and Bankruptcy Code 2016 (IBC) was heralded as a transformative legislation for corporate insolvency in India. However, recent developments and judicial interventions have revealed a critical vulnerability: the infiltration of fictitious or related-party creditors referred to as “ghost creditors” and the manipulation of voting powers through “phantom claims”. These deceptive tactics subvert the sanctity of the committee of creditors (CoC), distorting the commercial wisdom that the code seeks to rely on. This article critically examines the systemic lacunae enabling such manipulations, analyzes key judicial pronouncements, and proposes structural reforms to safeguard the integrity of the insolvency resolution process.

Introduction

The IBC vests substantial authority in the CoC, which plays a central role in evaluating and approving resolution plans under Sections 30 and 31. However, this creditor-centric model is vulnerable when the CoC’s composition is compromised. The infiltration of ghost creditors either fictitious entities or related parties disguised as independent creditors enables promoters and resolution applicants to regain indirect control of the insolvency process. These phantom creditors often hold no genuine financial exposure to the corporate debtor but are introduced with the sole intent of swaying crucial CoC decisions.

In this context, the current verification mechanisms under the IBC, particularly Regulation 13 of the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations 2016, appear inadequate to filter out fraudulent or conflict-ridden claims. As a result, the IBC’s foundational principle of fairness in resolution stands severely threatened.

The Anatomy of Ghost Creditors and Phantom Claims

Ghost creditors typically manifest through orchestrated entries in the corporate debtor’s books, balance confirmations, or dubious loan agreements often introduced belatedly. Resolution professionals (RPs), under pressure to adhere to strict CIRP timelines, sometimes admit such claims provisionally. This procedural leeway, while intended to ensure expediency, often becomes a conduit for manipulation.

Phantom claims, once admitted, can drastically alter the voting dynamics of the CoC. Since critical decisions such as liquidation, resolution approval, or withdrawal of corporate insolvency resolution process (CIRP) under Section 12A require high voting thresholds (66%-75%), even a marginal shift in creditor shareholding can produce materially different outcomes. The mischief lies not only in the admission of such claims but also in their subsequent strategic deployment.

Legal Framework and Statutory Vulnerabilities

The IBC provides that related-party financial creditors are ineligible to be part of the CoC under Section 21(2). However, it does not prescribe a uniform or mandatory framework for disclosing or verifying such affiliations during claim admission. Regulation 13(1) requires the RP to verify claims “on the basis of documents and other evidence”, but does not prescribe the scope or depth of due diligence.

Moreover, the lack of real-time public disclosure of claims along with limited windows for challenge results in stakeholders being blindsided by CoC compositions that are revealed too late in the process. The current regime also lacks a pre-emptive redressal mechanism where CoC formation itself can be contested before irreversible decisions are taken.

In the case of Sandeep Khaitan v. Piyush Periwal, the Supreme Court of India declared the CoC formed in the resolution of National Plywood Industries Limited as void ab initio due to the dominance of related-party financial creditors. The court held that such a CoC violated the independence envisaged under Section 21(2), thereby nullifying all subsequent decisions, including the liquidation vote. This judgment reaffirmed that any CoC tainted by related-party manipulation is legally untenable and constitutionally suspect.

Similarly, in PM Cold Store v. Goouksheer Farm Fresh, also known as the "NHSH Case”, this matter involved the suspicious inclusion of NHSH as a creditor, which diluted the rightful creditor’s voting power from 100% to below the threshold required to pass resolutions. The National Company Law Appellate Tribunal found the claim unverified and unsupported by substantive evidence. It emphasized the RP’s duty under Regulation 13 and ordered the immediate exclusion of NHSH from the CoC, directing the IBBI to examine the RP’s conduct.

Both decisions are critical affirmations of the judiciary’s intolerance for manipulation of the CoC. However, they remain remedial rather than preventative.

Impact on the IBC Ecosystem

The implications of such manipulation are manifold. First, it undermines the statutory objective of time-bound, value-maximizing insolvency resolution. Second, genuine financial and operational creditors face disenfranchisement, as their voting powers are diluted by entities with no real economic exposure. Third, it opens the door for failed promoters to regain indirect control of the company often through pre-arranged resolution plans submitted by proxies.

This also erodes the credibility of the IBC among foreign investors and institutional creditors, who expect transparency and fairness in the insolvency regime. Once stakeholder trust is compromised, even successful resolutions are viewed with skepticism, and long-term market participation is disincentivized.

Proposed Systemic Reforms

To preserve the integrity of the CoC and uphold the objectives of the IBC, structural reforms must be institutionalized:

Mandatory Pre-CoC claim verification

The RP must be statutorily mandated to complete comprehensive verification using audited financial statements, bank transaction trails, and corporate registry cross-checks before including any creditor in the CoC. Provisional admissions should be disallowed in CoC composition.

Centralized public registry of claims

The IBBI should establish a digital, publicly accessible portal where every claim is recorded with the creditor’s name, amount, supporting documents, verification status, and promoter affiliations. This will ensure transparency and enable early scrutiny by stakeholders.

Challenge window post-CoC constitution

A statutory period of 7 days must be provided after the initial constitution of the CoC for stakeholders to raise objections or challenge the inclusion of specific creditors. During this period, all CoC decisions should remain in abeyance.

Penal consequences for ghost claim insertion

Section 65 of the IBC must be invoked or amended to impose civil and criminal liability on promoters, RPs, or applicants found to have knowingly introduced fictitious or related party creditors. Such deterrence is essential for compliance.

Independent oversight and audit cell

The IBBI should constitute a specialized unit tasked with random audits of CoC formations, particularly in cases where the majority vote swings abruptly or is contested. RPs should face disciplinary action for negligent claim admissions.

Conclusion

The role of the CoC in India’s insolvency framework is both central and sacrosanct. However, when the foundation of this committee is compromised through ghost creditors and phantom claims, the entire CIRP process stands on shaky ground. The law, as it stands, offers only retrospective remedies. The need of the hour is for the IBC regime to evolve -- toward greater transparency, rigorous verification, and structural resilience.

By institutionalizing reforms, the IBC can insulate itself from manipulative tactics and reinforce stakeholder trust. The haunting presence of ghost creditors must be exorcised- not only to protect creditors and maximize value- but to preserve the very credibility of India’s insolvency resolution ecosystem.