India’s corporate affairs ministry is exploring the use of third-party litigation finance for avoidance actions under the insolvency code, aiming to improve recovery of disputed assets and address slow progress in insolvency proceedings.
India’s corporate affairs ministry is weighing the use of third-party litigation finance for avoidance actions under the insolvency code, a move that could help recover money tied up in disputed transactions and ease pressure on creditors. According to the ministry’s written reply to a parliamentary standing committee, the proposal will be tested against global practice and discussed with stakeholders before any decision is taken.
The focus is on PUFE cases, short for preferential, undervalued, fraudulent and extortionate transactions. These are deals struck before insolvency that can strip value from a distressed company by favouring select creditors, moving assets away from the business or otherwise weakening the estate available for resolution. The committee said such transactions directly reduce what creditors can recover and can leave insolvency professionals chasing complex claims with limited resources.
That financial constraint is at the heart of the argument for litigation funding. Under such arrangements, an outside investor pays the legal and related costs of a claim in return for a share of any eventual recovery. Insolvency lawyers say that could make it practical to pursue asset tracing, forensic accounting and recovery proceedings that are often abandoned because the estate is too depleted to bear the expense.
The scale of the problem remains large. Insolvency and Bankruptcy Board of India data cited in the report show that more than Rs 4.38 lakh crore was locked in 1,878 avoidance applications as of March 31, 2026. By June 2025, only 379 cases worth Rs 66,919 crore had been disposed of, with just Rs 7,931 crore ordered to be clawed back, underscoring how slowly such claims are moving through the system.
The committee has urged that any funding framework include safeguards, such as disclosure of funding arrangements to the adjudicating authority and the committee of creditors, a ban on funder control over litigation strategy, and transparent return structures. It also recommended regulatory oversight by the Insolvency and Bankruptcy Board of India.
The debate comes as the Insolvency and Bankruptcy Code continues to evolve. The Insolvency Amendment Act, 2026, has already widened the look-back period for avoidance transactions and clarified that such proceedings can continue even after a resolution plan is approved or liquidation is completed. Practitioners say that, taken together, these changes suggest a stronger intent to recover value that may have been siphoned off before insolvency proceedings formally begin.
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