Unmasking Hidden Liabilities: Regulation 38(2A) and the New Era of Transparency in IBC Resolution Plans
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Introduction
In July 2025, the Insolvency and Bankruptcy Board of India (“IBBI”) introduced a key amendment to the Corporate Insolvency Resolution Process (“CIRP”) Regulations by inserting Regulation 38(2A). This rule explicitly prohibits a resolution plan from assigning any avoidance transactions mentioned in Chapter III, Part II of the Insolvency and Bankruptcy Code (“IBC”) or fraudulent/wrongful trading claims provided in Chapter VI, Part II of IBC, unless they were fully disclosed in the Information Memorandum (“IM”) and formally communicated to all Prospective Resolution Applicants (“PRAs”) under Regulation 35A(3A). In effect, any avoidance claim or fraudulent trading application not identified and shared with Resolution Applicants (“RAs”) before the plan deadline cannot be bundled into the plan. This amendment was supported by IBBI guidance and reinforces that any proceeds or recoveries from such transactions must be transparent. As IBBI has noted, a plan “should not give the proceeds of avoidance transactions to the RA without detailing such transactions in the IM or Request for Resolution Plan (“RFRP”) and without transparent bidding.”
Avoidance Transactions and Fraudulent Trading under the IBC
Avoidance transactions in the IBC, as per Chapter III, Part II, include “preferential, undervalued, extortionate and certain fraudulent dealings entered into by the corporate debtor before insolvency.” Sections 43–50 of the Code empower the resolution professional to apply to the Adjudicating Authority (“AA”) to “claw back” such transactions in order to maximise assets for creditors. Fraudulent or wrongful trading claims are governed by Section 66 of the Code, which permits the AA to hold persons, typically former directors or promoters, liable for contributions if the business was carried on with the intent to defraud creditors or in a manner that was fraudulent. In practice, the Resolution Professional (“RP”) must identify these transactions and file applications, as per Section 25(2)(j) of the IBC read with Regulation 35A of the CIRP regulations, by the end of the CIRP. The outcome of these applications, once adjudicated, becomes part of the corporate debtor’s assets. Historically, because disposal of avoidance and fraud claims can extend beyond the CIRP timeline, regulations require that any plan specify who will pursue these claims post-approval and how recoveries will be shared.
New Regulatory Requirements under the Fifth Amendment
The Fifth Amendment by IBBI via notification dated July 4, 2025, revised Regulations 36 and 38 of the CIRP regulations. These changes impose strict disclosure and assignment rules:
Regulation 36(1): The IM must now include not only the initial details as of the insolvency commencement date, but also “its subsequent updates”. In other words, the RP must continually update the IM as new information emerges.
Regulation 36(2)(ha): A new clause (ha) requires the IM to contain “details of all identified avoidance transactions under Chapter III or fraudulent or wrongful trading under Chapter VI of Part II of the Code and subsequent filings before Adjudicating Authority, as referred under sub-regulation (3A) of regulation 35A.” This means the RP must list every known preferential/undervalued/fraudulent transfer, and every ongoing Section 66 application in the IM with reference to any AA filings already made, per Reg 35A(3A).
Regulation 38(2A): The centrepiece of the amendment, Reg 38(2A), provides that a resolution plan cannot assign any avoidance transaction or fraudulent/wrongful trading claim unless two conditions are met: (a) the transaction/claim was disclosed in the IM, and (b) it was intimated to all PRAs under Reg 35A(3A) before the plan submission deadline. In essence, any avoidance or Section 66 claim not flagged in the IM and shared with resolution applicants cannot be part of the plan. A proviso preserves plans already submitted before the amendment date.
Together, these provisions close a previous gap: they enforce that only avoidance/fraud claims that are known and notified can be taken into account by prospective bidders. In the words of one industry commentator, undisclosed avoidance claims “cannot be transferred under the resolution plan.” By mandating full disclosure in the IM and service on RAs as per Reg 35A(3A), the amendment ties the hands of any plan that seeks to “surprise” an applicant with unknown litigation.
Implications of the amendment for Resolution Professionals and Resolution Applicants
The amendment has direct implications for both RPs and resolution applicants. Practically, it creates a three-step process for dealing with avoidance/fraud claims:
Identify and File: The RP must diligently investigate the corporate debtor’s books and transactions to identify any preferential, undervalued, extortionate or fraudulent transfers per Sections 43–50 and any potential Section 66 misconduct. Timely applications to the AA must be filed as mandated by Section 25(2)(j) and Regulation 35A(2), 115/135-day deadlines.
Disclose in IM and Notify: All such identified claims and the status of corresponding AA applications must be documented in the updated Information Memorandum. Concurrently, by virtue of Regulation 35A(3A), the RP must forward copies of each avoidance/fraud application to every prospective resolution applicant. This ensures that all bidders have the same information regarding these contingent assets/liabilities.
Evaluate in Bid: Any resolution applicant can then factor the known avoidance/fraud claims into its plan bid. The resolution plan itself may allocate the right to pursue these claims, for example, allowing the successful applicant to retain recoveries, only if the claims were fully disclosed beforehand.
For resolution applicants, this is a welcome change in terms of clarity. Under the new rule, an applicant cannot be saddled post hoc with an unexpected litigation burden. Any claim not in the IM or notified cannot appear in the approved plan to benefit or bind the applicant. This removes the risk of “hidden” liabilities undermining a bid. In practice, RAs will now scrutinise the IM’s listed avoidance transactions and Section 66 filings when pricing their offers. They will know upfront what claims they may have to pursue after taking control.
For insolvency professionals, the amendment imposes an obligation to be proactive and thorough. Failure to identify or disclose an avoidance/fraud claim means it cannot be part of the plan; it effectively remains outside the resolution. RPs will need systems to regularly update the IM and ensure all AA filings reach the PRAs in time. Although this development imposes additional responsibilities on the RPs, it is consistent with their established obligations under the code. Previously, RPs were required to submit avoidance applications within prescribed deadlines and were also expected to disclose material claims in tender documentation. The recent regulatory amendments have now transformed this previously discretionary encouragement into a binding legal requirement, thereby formalising the RP’s obligations in the eyes of the court.
Addressing Practical Challenges
The need for this amendment arose from real-world challenges. Historically, RPs sometimes discovered avoidance or Section 66 matters late stages of the CIRP. If these were omitted from the IM or RFRP, successful applicants could later argue that they were unaware of large pending claims. This created disputes over whether proceeds from such transactions belonged to the new owners or the creditor pool. For instance, in Primal Capital v 63 Moons Technologies, the Supreme Court dealt with a contentious plan clause regarding Section 66 recoveries, which addresses fraudulent or wrongful trading. The clause permitting the successful RA to retain the proceeds of such recoveries was approved by CoC. This arrangement was challenged by the financial creditor, who argued that these assets ought to benefit all creditors collectively. While the Court ultimately upheld the CoC-approved clause allowing the RA to retain fraudulent trading recoveries, it emphasised commercial wisdom. However, the case underscored the importance of transparent disclosure.
By contrast, the new regulation eliminates ambiguity: if an applicant were to receive any benefit from avoidance/fraud claims, they must have known exactly what those claims were. As one industry analysis notes, plans before the amendment “must not provide for assignment of any avoidance transactions that were not disclosed in the information memorandum or intimated to all prospective resolution applicants”. In other words, undisclosed claims are off-limits. This closes a loophole where a plan might otherwise quietly transfer pending litigation rights to the bidder without proper notice.
The amendment also encourages transparency during the bidding process. To borrow the language of a recent discussion paper, it promotes a “level playing field” by ensuring all bidders have the same information about contingent assets. If the CoC wishes to allocate certain avoidance recoveries to a bidder, the affected RAs must have had the opportunity to value them in their offers. This addresses the concerns raised by practitioners that resolution applicants should not “bid blindly” on recoveries they did not know existed.
Operationally, this has several practical effects: any new avoidance claim identified after the EOI deadline simply cannot be shoehorned into the plan. Instead, it would have to be pursued separately, likely in liquidation if a plan has already been approved. Conversely, once the amendment is in force, RAs can assume that the IM fully captures all material avoidance/fraud matters. Creditors can also be assured that the future proceeds of such transactions will be handled transparently; they will be either retained by the CoC or sold via bidding, as IBBI has recommended.
Improving Fairness and Creditor Outcomes
By mandating disclosure, the amendment advances both fairness and value maximisation in CIRP. Fairness is achieved by eliminating informational asymmetries: no resolution applicant can claim later that it was unfairly burdened by a surprise litigation. The IBBI has long stressed that recoveries from avoidance proceedings “would be in the collective interest of creditors”, and this rule ensures those recoveries are realised under open terms. It also discourages underbidding; applicants must factor all known recoveries into their bids, likely leading to higher offers for the corporate debtor’s estate.
In practical terms, the amendment aligns with existing IBC principles. Chapter III (Sections 43–50) treats avoidance assets as part of the debtor’s estate, while Section 66 and related Chapter VI provisions allow contributions from fraudsters. Requiring them to be clearly acknowledged in the IM and bid documents is consistent with the Code’s goal of maximising estate value. In fact, the amendment echoes an IBBI guidance note, which observed that “avoidance transactions being assets of the CD, could be permitted by the CoC to be bid by prospective resolution applicants,” but only after full disclosure and transparent bidding. Now the regulations enforce that approach.
Moreover, this amendment complements Regulation 35A (3A), which already obliges the RP to share avoidance/fraud applications with PRAs. Together, these rules close the loop: identification by the RP, disclosure in the IM, direct communication to RAs, and permitted assignment in the approved plan only if these steps were followed. The overarching result is greater certainty and legitimacy in how avoidance and Section 66 recoveries are handled.
Conclusion
The July 2025 amendment of Regulation 38, with its insertion of sub-regulation (2A), is a practical and targeted reform. It resolves real challenges faced by resolution professionals and applicants by tying any assignment of avoidance or fraudulent trading claims to prior disclosure obligations. The rule complements existing provisions in the IBC Chapter III and VI and earlier regulations (Reg 35A) to ensure that these significant contingent assets are treated openly. Ultimately, the change promotes transparency, protects resolution applicants from hidden liabilities, and helps creditors benefit more directly from recoveries. As one commentator observed, such measures “ensure transparency, fairness, and effective treatment of avoidance transactions” in the resolution process. The amendment is thus a welcome step toward strengthening the integrity and predictability of India’s insolvency regime.
*The author is a Fourth-year B.A., LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow.
