Forensic Audits in CIRP: How Resolution Professionals Identify PUFE Transactions

Resolution professionals identify PUFE transactions by reconstructing the corporate debtor's dealings in the years before insolvency and testing each suspicious transaction against the statutory tests for preferential, undervalued, fraudulent and extortionate transactions under the Insolvency and Bankruptcy Code 2016. In practice they usually appoint a transaction or forensic auditor to do this, because the regulation 35A timelines leave little room for the resolution professional to do it alone. No regulation makes such an audit mandatory, but the duty to form an opinion and apply to the NCLT is clear.

This article explains the legal framework, including the changes made by the IBC (Amendment) Act 2026, and how a forensic audit in CIRP is typically carried out.

What is the resolution professional required to do?

Section 25(2)(j) of the IBC, as substituted in 2026, requires the resolution professional to file an application with the Adjudicating Authority (NCLT) in respect of any avoidance transaction or fraudulent or wrongful trading. The 2026 Act also introduced definitions: an "avoidance transaction" means a transaction under sections 43, 45, 49 and 50, and "fraudulent or wrongful trading" refers to section 66.

Regulation 35A of the CIRP Regulations 2016 sets the timetable, counted from the insolvency commencement date:

The NCLAT, in Aditya Kumar Tibrewal v. Om Prakash Pandey, treated these timelines as directory rather than mandatory. Even so, a resolution professional who misses them without good reason will face questions from the committee of creditors and, potentially, the regulator.

Under regulation 27, the resolution professional may appoint professionals, at arm's length and through an objective and transparent process, to assist. Transaction auditors are commonly appointed this way.

What are the PUFE transactions and their look-back periods?

Preferential transactions exclude transfers in the ordinary course of business and certain new-value security interests. Under section 44, related parties are presumed not to have acted in good faith, which matters when the NCLT considers relief against recipients.

More detail on each category is in our knowledge base entry on avoidance transactions.

What did the IBC (Amendment) Act 2026 change?

The Amendment Act (Act 6 of 2026) was brought largely into force on 26 May 2026, including all the avoidance-related changes.

• Look-back computation. For sections 43, 46 and 50, the relevant period now runs from the stated period before the initiation date, meaning the date the insolvency application was filed, up to the insolvency commencement date. Previously it was counted back from the commencement date only. This closes the gap created by the time an application spends pending admission. Where several applications are pending, the initiation date is the date of the first.
• Survival of proceedings. The substituted section 26 says filing an avoidance, fraudulent or wrongful trading or section 47 application does not affect the CIRP or liquidation, and its Explanation clarifies that completion of the CIRP or liquidation does not affect the continuation of those proceedings. This puts in statute the Delhi High Court's 2023 ruling in Tata Steel BSL Ltd. v. Venus Recruiter Pvt. Ltd. that avoidance applications survive the CIRP.
• Creditor applications under section 47. Where a preferential, undervalued, extortionate or fraudulent or wrongful trading transaction has occurred and the resolution professional or liquidator has not reported it, a creditor (alone or jointly), a member or a partner may apply to the NCLT. If the NCLT finds the professional had sufficient information or opportunity to obtain it and did not report, it must direct IBBI to initiate disciplinary proceedings.
• Section 49. The protection for good-faith purchasers covers interests acquired from a person other than the corporate debtor or a related party of the corporate debtor, so assets passed on through a related party no longer benefit from it.
• Liquidators and section 66. The liquidator can now apply for fraudulent and wrongful trading relief.

The practical effect is that a thin or superficial transaction review now carries more risk for the resolution professional, because creditors can bring unreported claims themselves.

How does a transaction audit work in practice?

1. Securing the records

The audit starts with books of account, bank statements for all accounts, fixed asset registers, loan and security documents, board and shareholder minutes, related-party registers and email or document repositories where available. Gaps are common, particularly where former management is uncooperative, so the auditor often rebuilds data from bank statements and third-party confirmations.

2. Defining the review period

The auditor applies the relevant look-back periods from the initiation date, while noting that section 49 and section 66 are not tied to fixed periods. Many audits review a longer window to understand patterns.

3. Identifying related parties

Related-party mapping uses the Companies Act section 2(76) definition and IBC section 5(24), then goes further: common directors, shared addresses, family links and entities with no visible business. Beneficial ownership analysis is often where the most significant findings arise.

4. Testing transactions

Typical tests include:

• payments to creditors shortly before insolvency, especially related parties, compared with the creditor's ranking under section 53;
• asset sales and transfers compared with independent valuations;
• write-offs, credit notes and settlements of receivables;
• loans and advances to group companies with no recovery;
• fund flows through intermediaries that return to promoter entities, a form of round-tripping;
• interest rates and charges on credit facilities for extortionate terms.

5. Reporting

The report sets out each transaction, the evidence, the statutory test applied, the amount and the recommended course of action. It must be clear enough for the resolution professional to form an opinion and for counsel to draft applications.

What patterns do transaction audits commonly find?

Findings vary by sector, but some patterns recur in Indian insolvencies:

• repayment of promoter or group-company loans in the months before default while trade creditors went unpaid;
• sale of land, plant or brands to related entities at book value or below market value;
• large advances to suppliers or contractors that were never adjusted against deliveries;
• write-off of receivables from related customers without recovery efforts;
• fresh security created over company assets for old debts owed to favoured lenders;
• circular transactions that inflate turnover or move funds through intermediaries and back to promoter entities.

Each finding must still be tested against the statutory elements. A payment to a related creditor is not automatically preferential if it was in the ordinary course of business, and a low sale price is not automatically undervalued without credible valuation evidence. The quality of the audit lies in that discipline, which is what allows the NCLT to grant relief.

Why do findings matter for the resolution plan?

The CIRP (Fifth Amendment) Regulations 2025 require the Information Memorandum to list all identified avoidance and fraudulent or wrongful trading transactions and to be kept updated. Under the new regulation 38(2A), a resolution plan cannot assign such claims unless they were disclosed in the Information Memorandum and intimated to prospective resolution applicants before the bid deadline. Resolution plans must also explain how the applicant will deal with pending avoidance applications.

Timely, well-documented findings therefore affect what the claims are worth in a resolution plan as well as in litigation.

How is this different from a bank's forensic audit?

A transaction audit in CIRP serves the resolution professional's statutory duties. A lender's forensic audit, commissioned under its fraud risk management policy, serves a different purpose: deciding whether to classify an account as fraud under the RBI's 2026 Fraud Risk Management Directions. The two can cover similar ground but answer different questions. The broader distinctions are discussed in our post on forensic audit vs statutory audit, and directors' personal exposure is covered in our post on fraudulent and wrongful trading under section 66.

How Spectra Forensics can help

Our stressed asset and insolvency forensics supports resolution professionals and creditors with transaction audits covering record reconstruction, related-party mapping, PUFE and section 66 analysis and reporting aligned to the regulation 35A timelines. Our stressed asset and insolvency forensics and forensic accounting and data analytics services cover fund-flow tracing and diversion analysis for lenders and creditors.

Spectra Forensics has completed 1,250+ investigations across 19+ years. To discuss a mandate, contact us.