The Ministry of Corporate Affairs (MCA) intends to examine the possibility of attracting third-party financing for legal proceedings related to PUFE transactions (Preferential, Undervalued, Fraudulent, and Extortionate Transactions) under insolvency regimes. The goal of this review is to increase the level of fund recovery.
In a written response to the parliamentary standing committee, the ministry stated that the analysis of financing litigation for PUFE transactions will be conducted considering global best practices and refined through detailed consultations with all stakeholders.
In its comments, the ministry emphasized that the market for litigation funding in India is still in its early stages of development. According to the Insolvency and Bankruptcy Board of India (IBBI), as of March 31, 2026, funds exceeding 4.38 lakh crore rupees were frozen in avoidance proceedings.
Up to June 2025, only 379 cases amounting to 66,919 crore rupees had been settled, with a recovery of 7,931 crore rupees mandated.
Litigation funding, or third-party dispute financing, is an agreement where an external investor covers the plaintiff's legal expenses. In return, the financier receives a pre-agreed share of the financial recovery if the case is won.
Practitioners of insolvency law noted that claims related to PUFE transactions are often not pursued due to funding limitations, and that implementing such financing could make this process more effective.
Daisy Chaula, Senior Partner at S&A Law Offices, stated that third-party financing, if permitted for PUFE claims, could easily cover the costs of lawyers, investigations, and experts, with returns tied to success. This would ease the burden on creditors and support recovery from promoters or affiliated parties who diverted funds from the Corporate Debtor.
The House Committee, in its report on the measures taken by the MCA, noted that avoidance transactions directly reduce the value available to creditors. These transactions are made by corporate debtors before the commencement of insolvency proceedings in such a way that they unfairly favor certain creditors or divert company assets, thereby diminishing the value available for resolution.
The Insolvency and Bankruptcy Code Amendment Act of 2026 extended the look-back period for avoidance transactions; now they are considered from the date of initiation (filing date) rather than the date insolvency proceedings began. This was done to cover transactions made during the interim period before recognition that could have been used to siphon off assets. The Act also clarified that proceedings related to avoidance transactions will continue even after the completion of resolution or liquidation processes.
Arguing for the necessity of third-party litigation funding, the committee ruled that it would enable the pursuit of complex and costly claims, such as tracking diverted assets, conducting forensic audits, and initiating recovery actions, without imposing additional financial burdens on the already depleted assets of the insolvent company.
The committee recommended that such a system include appropriate safeguards, including mandatory disclosure of funding schemes to the Adjudicating Authority and the Committee of Creditors, a prohibition on the financier controlling the litigation strategy, transparent and reasonable return structures, and regulatory oversight by the IBBI.
