The Judicial Vacuum in CIIRP: Risk of Irreversible Asset Dissipation

[Ritik is a student at National Law School of India University.]

The Insolvency and Bankruptcy Code (Amendment) Bill 2025 (Bill) was introduced in Lok Sabha in August 2025 to address the issue of procedural delays and inefficiencies in the existing Insolvency and Bankruptcy Code 2016 (IBC). One of the major amendments is the introduction of a creditor-initiated insolvency resolution process (CIIRP) under Clause 40 of the Bill, which aims to reduce delays by establishing an out-of-court initiation process. Thus, CIIRP represents a shift from the existing judicial admission model under Section 7 of the IBC to a process commencing upon the public announcement by a resolution professional under the proposed Section 58B(4). One crucial provision in the Bill is Clause 58B(2)(b) that mandates a 30-day notice period to be given to the corporate debtor before appointing the resolution professional (RP). 

The author argues that the CIIRP framework, especially Section 58B2(4), in its attempt to improve efficiency and delays, creates a judicial vacuum during the mandatory 30-day notice period. This judicial vacuum arises due to the process being out of court initially, which prevents the creditors from approaching the Adjudicating Authority for preventive orders in cases of asset dissipation by the corporate debtor. In this article, the author demonstrates that this structural flaw allows debtors to exploit Section 5 of the Foreign Exchange Management Act 1999 (FEMA) for irreversible asset dissipation. Thus, the subsequent recovery under Section 43(3)(a) of the IBC is rendered ineffective, that also contravenes the principles of immediate asset preservation advocated by UNCITRAL.  

The Judicial Vacuum: The Absence of a Preventive Mechanism in CIIRP

The Standing Committee on Finance’s Twenty-Eighth Report noted that out of INR 3.76 lakh crore identified avoidance transactions, a mere INR 7,500 crores have been recovered. This shows the importance of the pre-commencement stage, where there is a high risk of asset stripping by the distressed debtor. Under the current IBC regime, National Company Law Tribunal (NCLT) has the authority to intervene even in the pre–admission stage under Rule 11 of the NCLT Rules 2016. In the case of NUI Pulp and Paper Industries Private Limited v. Roxcel Trading GMBH, NLCT ordered an interim order that froze the debtor’s assets before the admission of a Section 9 application under the IBC. National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s order holding that filing of the insolvency application before NCLT gives the Tribunal the jurisdiction to use the inherent powers to prevent the abuse of the process like dissipation of assets.

The new CIIRP process does not have this preventive mechanism. Under the proposed Section 58B, the insolvency process begins with a 30-day notice to the corporate debtor. The initiating financial creditor must then obtain approval from other financial creditors representing at least 51% percent in value of the debt, as notified by the Central Government, under Section 58B(2)(a). It is only after these out-of-court requirements are met that an RP can be appointed under Section 58B(3), who then makes a public announcement under Section 58B(4) to formally commence the process. This multi-stage, pre-filing procedure creates a prolonged window where the matter remains outside the NCLT's purview. Since, during the initial process, there is no application pending before the NCLT, NCLT may be jurisdictionally barred from using its inherent powers under Rule 11 as established in the case of NUI Pulp. During this period, the protective mechanism of moratorium under Section 14 also remains dormant as it only takes effect after the insolvency formally commences. Thus, it results in a judicial vacuum where the debtor gets the notice of the impending insolvency while the creditor is left with no legal remedy to prevent the immediate dissipation of assets. 

The Consequence: Facilitating Irreversible Dissipation

The judicial vacuum during the 30-day notice period gives the corporate debtor an opportunity to strip off its assets. One of the easy routes is through outward remittances for business purposes governed by FEMA. Section 5 of FEMA permits any person to remit funds for ‘Current Account Transactions’ that are part of a company’s routine operations, which include payments for imports, professional services, and consultancy fees, etc. During the 30-day period, the debtor can use section 5 of FEMA to transfer payments to related parties or shell companies in the guise of the ‘ordinary course of business’.  In the case of GVR Consulting Services Pvt. Ltd. v. Pooja Bahry NCLAT found that directors had siphoned funds by making preferential payments disguised as repayments of unsecured loans to consulting entities. This case confirms that asset stripping through service-based entities is a real, identifiable modus operandi in the corporate world. 

The Failure of Post-Facto Recovery

After the CIIRP officially commences, the only tool left for recovering such dissipated assets is an avoidance application under Section 43 of the IBC. However, there is an exception given under Section 43(3)(a) which states that a transaction shall not be considered a preference transaction if it was made in the ‘ordinary course of the business or financial affairs of the corporate debtor or the transferee’. Corporate debtor can use this provision to argue that payments made under current account transactions (as defined under FEMA), like payments for imports, professional or consultancy services, fall under the ordinary course of business  exception. In the case of ICICI Bank Limited v. Shailendra Ajmera, NCLAT held that the corporate debtor’s payments from current accounts to settle dues for importing raw materials under a pre-existing letter of credit facility were an ‘ordinary course of business transactions’. Similarly, in the case of Anuj Jain v. Axis Bank Limited, Supreme Court held that the ‘ordinary course’ exception must be interpreted to protect transactions that are part of the ‘undistinguished common flow of businesses’. Thus, a payment made under FEMA’s current account provisions, supported by an invoice, creates a strong evidentiary presumption that it falls within this protected category, making the RP’s burden of proof to rebut this claim exceptionally high. 

The Inadequacy of Clause 26 of the Bill

Clause 26 of the Bill was introduced to amend Section 43(4) of the IBC to expand the ‘look-back period, so that it covers the period between the notice and the formal commencement of Insolvency. Although this will extend the powers of the RP to investigate the transactions made during the 30-day period, it does not address the substantive concern mentioned. The look–back perio will not be effective if the corporate debtor disguises the transactions under the ‘ordinary course of business’ defence under Section 43(3)(a) of the IBC. Similarly, even though the transactions do not come within the exception, it will be very difficult for the RP to meet the evidentiary burden as  cross-border transactions get layered by debtors using offshore entities. The use of the post facto avoidance has not been a successful strategy for the recovery of cross-border assets. The Standing Committee on Finance’s Twenty-Eighth Report shows that only 2% of the identified avoidable transactions have been recovered. This shows that once liquid assets are siphoned abroad, they are rarely recovered. 

UNCITRAL and Proposed Reforms

The procedural gap highlighted in the CIIRP procedure is a significant departure from the globally accepted best practices in insolvency law. Recognising that a debtor facing insolvency is highly likely to dissipate assets, UNCITRAL’s Asset Tracing and Recovery Toolkit (ATR) recommends a swift  intervention which includes an ‘element of surprise’. UNCITRAL explicitly addressed the judicial gap between initiation of proceedings and its formal commencement,  recommending the availability of ex parte judicial measures allowing creditors to obtain an asset freezing order without prior notice to the debtor. This remedy will only be available if the NCLT  has at least an ad interim jurisdiction during the notice period. Thus, one suggestion to implement the UNCITRAL recommendation is to grant the initiating creditor a limited right under Clause 58B to seek judicial intervention by filing an application before NCLT during the 30-day notice period. Crucially, this power would be limited to seeking interim relief against apprehended asset dissipation, mirroring the remedies given by the NCLAT in NUI Pulp case. This will fill the judicial gap existing during the 30-day notice period, giving creditors an opportunity to prevent asset dissipation by the corporate debtor while still fulfilling the objective of the CIIRP. 

Conclusion

The CIIRP procedure, aiming for efficiency and speed, creates a judicial vacuum which can potentially be used by the corporate debtor to dissipate assets. The 30–day mandatory notice period, removes the possibility of preventive judicial orders like asset freeze that have been proven essential and necessary as per UNCITRAL’s ATR recommendations for asset preservation. This judicial gap allows debtors to exploit specifically FEMA provisions for irreversible asset transfer. To address this, the Bill must make it mandatory to upload Section 58B notice to the information utility which can automatically push an alert to RBI. This will provide an enhanced due diligence on the part of RBI and authorised dealer banks for any outward remittances, and explore providing for workable measures for preventing asset-transfer during the pre-commencement stage of CIIRP for ensuring adherence to the key principle of  Indian insolvency regime, maximising the value of the assets.