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Feb 06- 2026

IBC Under Scanner: Supreme Court Flags Asset Undervaluation and Insider Buybacks in Insolvency Process

EAS SARMA V. UNION OF INDIA & ORS.

The Insolvency and Bankruptcy Code, 2016 (IBC), once hailed as a transformative reform for resolving corporate distress in India, has come under sharp judicial scrutiny. During the hearing of a Public Interest Litigation (PIL) concerning alleged large-scale bank fraud by companies of the Anil Dhirubhai Ambani Group (ADAG), the Supreme Court raised serious concerns regarding the systemic misuse of the IBC framework, particularly in relation to asset undervaluation and insider-controlled resolution processes.

A Bench comprising Surya Kant, Chief Justice of India, and Justices Joymalya Bagchi and Vipul Pancholi, was hearing the matter filed by former Union Government Secretary EAS Sarma, seeking a Court-monitored investigation into alleged bank collusion and loan fraud amounting to over ₹40,000 crore.

Allegations Of Bank Fraud and Collusive Insolvency

The petition pertains to alleged irregularities in lending and subsequent insolvency proceedings involving ADAG companies, including Reliance Communications and Reliance Infrastructure. The PIL seeks investigation into the role of banks, financial institutions, and public officials in permitting what the petitioner terms as strategic bankruptcies under the IBC.

Senior Advocate Prashant Bhushan, appearing for the petitioners, submitted that the total outstanding dues of ADAG companies were approximately ₹47,000 crore, yet the assets were allegedly sold for ₹455 crore, barely 1% of the outstanding amount. Crucially, it was argued that the assets were acquired by a company linked to the promoter’s family, raising serious concerns of conflict of interest and insider dealing.

Supreme Court’s Observations on IBC Misuse

Expressing grave concern, CJI Surya Kant observed that the IBC mechanism is increasingly being exploited rather than used as a genuine resolution tool. In a scathing remark, the Court stated that:

The IBC platform is now being misused like anything assets are deliberately undervalued, auctions are pre-planned, and companies are ultimately bought by family members or close associates.

The Court highlighted a disturbing pattern where companies voluntarily declare insolvency, appoint valuers of their own choosing, and ensure that assets are valued at a fraction of their true market worth. According to the Bench, such practices defeat the core objectives of the IBC maximisation of asset value and protection of creditor interests.

The CJI further noted that these instances are routinely coming before the Supreme Court, indicating a deeper structural flaw in the insolvency regime.

Government Acknowledges Structural Issues

Responding to the Court’s concerns, the Solicitor General informed the Bench that the Government of India is actively deliberating reforms to address these systemic loopholes. While refraining from detailed submissions due to ongoing discussions, the SG acknowledged that the issue of IBC misuse is under “very serious consideration” at the policy level.

Defence By ADAG And Status of Proceedings

Senior Advocate Mukul Rohatgi, appearing on behalf of Anil Ambani, submitted that the resolution proceedings under the IBC are still pending and that no final conclusions should be drawn at this stage.

Court Pulls Up CBI Over FIR Registration

Apart from insolvency concerns, the Supreme Court also took strong exception to the manner in which the Central Bureau of Investigation handled complaints from multiple banks.

The Court noted that:

  • Only one FIR was registered in 2025 based on a complaint by the State Bank of India.
  • Complaints from other banks were clubbed by merely expanding the scope of the original FIR.

The Bench observed that this approach does not conform to procedural law, as each complaint represents a distinct transaction, necessitating separate FIRs. Consequently, the Court directed the CBI to also investigate possible collusion by bank officials, signalling judicial intolerance towards institutional complacency.

Broader Implications for the Insolvency Regime

The observations in EAS Sarma v. Union of India strike at the heart of India’s insolvency framework. The case raises critical questions on:

  • Independence and transparency of asset valuation
  • Promoter influence in resolution processes
  • Accountability of banks and financial institutions
  • Effectiveness of regulatory oversight under the IBC

If left unaddressed, such practices risk transforming the IBC into a tool for asset recycling by defaulting promoters, rather than a mechanism for genuine corporate revival or equitable liquidation.

Conclusion

The Supreme Court’s remarks mark a significant judicial intervention in the evolving jurisprudence of insolvency law in India. By spotlighting the systematic undervaluation of assets, insider acquisitions, and procedural lapses in criminal investigations, the Court has sent a clear signal that economic legislation cannot be allowed to operate in a vacuum of accountability.

The outcome of this case may well influence future amendments to the IBC, stricter valuation norms, and enhanced scrutiny of bank conduct reshaping the balance between ease of resolution and protection of public financial interests.