The Ministry of Corporate Affairs is considering third-party litigation funding to help recover assets in insolvency cases involving fraudulent or undervalued transactions. With over Rs 4.38 lakh crore currently tied up in these disputes, the proposal aims to help creditors recover funds without bearing the burden of high legal costs.
The Ministry of Corporate Affairs (MCA) is actively exploring the potential for litigation funding within India’s insolvency framework. This proposal focuses on cases involving Preferential, Undervalued, Fraudulent, and Extortionate (PUFE) transactions. The core goal is to unlock significant capital that remains trapped in legal proceedings, preventing creditors from receiving their dues in a timely manner.
Unlocking Stuck Assets in Insolvency
Data from the Insolvency and Bankruptcy Board of India (IBBI) as of March 31, 2026, highlights the scale of the challenge: more than Rs 4.38 lakh crore is currently tied up in 1,878 avoidance applications. These are legal actions taken by insolvency professionals to claw back money that may have been siphoned off or moved out of a company before it entered insolvency.
Historically, these recovery actions can be expensive, time-consuming, and complex. Creditors, who are already facing losses from the company's failure, are often reluctant to spend more money on legal battles with uncertain outcomes. Litigation funding could address this by allowing an independent investor to finance the legal expenses. If the legal action succeeds and assets are recovered, the investor receives a pre-agreed share of the proceeds. If the case fails, the investor typically absorbs the loss, shielding the creditors from further financial damage.
Challenges and Regulatory Needs
While the concept offers a potential solution to a major bottleneck in the insolvency system, it remains a complex area. As of August 2026, India does not have a comprehensive, formal regulatory framework specifically for litigation funding in insolvency. This creates uncertainty regarding how these funding agreements should be structured, taxed, and enforced. Furthermore, the Indian judicial system often faces significant delays, which can impact the economic viability for potential funders who expect returns within a reasonable timeframe.
The parliamentary standing committee, which has reviewed the MCA's approach, has cautioned that any such framework must include strong safeguards. These include mandatory disclosure of all funding agreements to the Committee of Creditors and the Adjudicating Authority to ensure transparency. There is also a consensus that funders should not have control over the litigation strategy, ensuring that the legal process remains focused on the interests of the creditors rather than the profit motives of the investor.
This initiative comes at a time when the MCA and IBBI are focused on digitizing and streamlining the insolvency ecosystem, including the development of the Integrated Platform for Insolvency Ecosystem (iPIE). For investors and stakeholders in the banking and stressed assets sector, the key monitorable will be how the government designs the rules to balance the need for faster asset recovery with the requirement to prevent potential misuse of the litigation funding mechanism.