From Process to Liability: How delegated authority is now being scrutinised

For years, corporate insolvency in India was treated as a largely commercial exercise. Once a matter entered the Insolvency and Bankruptcy Code, 2016 (“Code”) framework, businesses assumed that risks were limited to financial outcomes i.e. haircuts, loss of control, or liquidation. That assumption is now proving to be dangerously outdated.

A recent enforcement action by the Directorate of Enforcement (“ED”) in the matter of Richa Industries Limited (“RIL”) arising out of an insolvency process shows how closely insolvency conduct is now being examined alongside enforcement laws such as the Prevention of Money Laundering Act, 2002 (“PMLA”), and Prevention of Corruption Act, 1988 (“PC Act”). Interestingly, what stands out is not only the allegations of fund diversion, but the manner in which the insolvency process itself has come under scrutiny. The focus in the matter is no longer on just past wrongdoing, but on how the statutory process was followed during insolvency.

In brief, the former resolution professional (“RP”) of RIL was arrested by ED based on the investigations performed pursuant to the FIR registered by the CBI alleging that there was a criminal conspiracy, and wrongful gain during the conduct of the CIRP process by the erstwhile promoters along with the RP, thus enabling diversion of company funds through layered transactions, and that they personally benefitted from such flows. Based on the investigation thereafter conducted, the ED through its investigation has further observed that the Committee of Creditors (“CoC”) was allegedly manipulated through admission of sham or inflated claims, and the suspended promoters continued to exercise operational influence. In addition, the avoidance proceedings that should have been initiated by the RP under the Code were allegedly not pursued despite audit red flags, and the ineligible resolution plans linked to the promoter group were allowed to proceed, which ultimately according to the ED, culminated in significant losses to public sector banks.

It is important to understand that the Code is built on a simple idea, once insolvency begins, control must move away from promoters and management and be exercised independently, prioritizing the interest of the creditors. Accordingly, the RP is meant to act as a neutral custodian, and the CoC is expected to take commercial decisions based on genuine financial exposure. When this structure works, insolvency serves its purpose of value protection and fair resolution.

However, the problem arises when the process is used to achieve outcomes the Code was designed to prevent as has been observed by ED in the present case. If such conduct is established, it is not merely an insolvency failure, but it raises serious questions under enforcement and criminal law as well.

This is where the intersection of laws becomes critical for businesses. Under the PMLA, liability does not arise only from generating illegal money, but it also arises from knowingly helping such money appear legitimate. When an insolvency process is allegedly used to legitimize transactions, preserve control, or protect benefits flowing from earlier misconduct as has been alleged in the RIL matter, the distinction between “commercial decision” and “enforcement exposure” becomes very thin.

Promoters often believe that stepping back formally during insolvency is sufficient, even if influence continues through informal channels, while creditors on the other hand assume that approval by the CoC will shield decisions from later scrutiny. Although the professionals involved in the process may believe that following basic procedure is enough, the recent developments suggest otherwise. Regulators are now asking a more direct question, which is “Who actually controlled the outcome?”, and “Who benefitted from it?”.

Another important dimension emerging among the scenario is the unsettled legal position of the RP itself. Courts have, at different points, taken divergent views on whether a RP performs the role of a “public servant” or acts merely as a private professional. While some judgments have treated the RP as a public servant for the purposes of accountability and anti-corruption safeguards, others have held that an RP does not fall squarely within that definition under the PC Act.

This lack of clarity creates a significant grey area. If an RP is treated as a public servant, procedural safeguards under the PC Act, including sanction requirements and investigative thresholds, may apply. If not, similar conduct may still be examined under other enforcement statutes such as the PMLA or the IPC, without those safeguards. Thus, from a practical standpoint, this means that the same set of actions during a CIRP can attract very different legal consequences depending on how the RP’s role is characterized.

Now, for businesses and professionals involved in insolvency proceedings, this uncertainty matters. RPs today exercise extensive control over assets, operations, claims, and decision-making during CIRP, and when accountability standards are unclear, enforcement exposure becomes unpredictable. Until there is consistent judicial guidance, RPs and those engaging with them operate in a space where statutory power is high, scrutiny is intense, and procedural protections remain unsettling. That uncertainty itself is a risk factor the insolvency ecosystem may no longer ignore.

Thus, actions taken during CIRP, such as admitting claims, choosing not to pursue certain transactions, allowing operational control to continue, or forwarding resolution plans are no longer assessed only under the Code, but they are increasingly examined for their intent, effect, and alignment with broader enforcement laws.

In that context, insolvency processes must be treated as high-stakes governance environments, rather than routine procedural exercises, and any direct or indirect interference with such processes invites serious regulatory consequences. The independence must therefore exist in substance, not merely on paper, and any inaction must be explainable, and not just be based out of convenience.

In today’s regulatory climate, process integrity matters as much as financial outcome. When insolvency mechanisms are used properly and functions as intended, they protect value and restore confidence in the system. When they are misused, they can trigger consequences far beyond the NCLT, drawing the attention of enforcement agencies, leading to attachment proceedings, and causing long-term reputational damage. That is the risk businesses can no longer afford to ignore.