The Ministry of Corporate Affairs’ (MCA’s) move to examine third-party litigation funding for proceedings involving preferential, undervalued, fraudulent and extortionate (PUFE) transactions could open a new avenue for recovering assets under the Insolvency and Bankruptcy Code (IBC), 2016, sectoral experts said.
The success of the proposal, however, will depend on regulatory clarity, safeguards against funder interference and the ability to enforce recovery orders, they said.
As of March 2026, around ₹4.38 trillion was locked in 1,878 avoidance applications, highlighting the scale of potential recoveries that remain tied up in insolvency proceedings. Third-party funding could help address the inability or reluctance of creditors and insolvency professionals to bear the additional costs of pursuing lengthy litigation, the experts said.
“The real significance of third-party funding is that it can infuse life into these dormant legal rights into actionable recovery opportunities,” said Manmeet Singh, partner at Cyril Amarchand Mangaldas.
Creditors were often unwilling or unable to incur additional costs, despite IBC provisions to pursue PUFE transactions, Singh said.
The proposal could be a turning point for recoveries under the IBC, Rahul Hingmire, co-founder and managing partner at Vis Legis Law Practice, said, adding that resolution professionals often identify questionable transactions but lack the resources for forensic investigations and prolonged legal proceedings.
“For example, a company may have a strong Rs 100 crore avoidance claim, yet creditors may hesitate to spend another Rs 2 crore pursuing it. An outside funder can bear that financial risk,” he said.
However, Hingmire cautioned that the ₹4.38 trillion involved in pending applications should not be treated as guaranteed recoveries.
Funding could help pursue genuine claims, but it would not automatically speed up adjudication or strengthen weak cases, he said.
Avoidance applications were often filed because the Code required resolution professionals to do so, but were seldom pursued with the seriousness they deserved, Sameer Jain, managing partner at PSL Advocates & Solicitors, said.
“The estate has no money for forensic audits, asset tracing and senior counsel, and the lenders, having already taken a substantial haircut, are reluctant to spend further on a claim which may take years to decide,” he said.
Third-party litigation funding involves an investor who is not a party to a dispute financing legal expenses, including lawyers’ fees, court fees and investigation costs, in exchange for an agreed share of successful recoveries. If the case fails, the funder generally bears the financial loss.
India has no dedicated central legislation governing litigation funding, although such arrangements are not prohibited and have been addressed by both the Supreme Court and the Delhi High Court in separate rulings.
In 2018, the Supreme Court clarified that it does not prohibit non-lawyers from funding litigation, while the Delhi High Court recognised the role of third-party funders in facilitating access to justice in 2023.
The high court held that a funder not party to the arbitration proceedings could not automatically be made liable for an adverse costs award or directed to furnish security.
Experts, however, believe that the ruling did not settle the legal position for insolvency-related litigation, where a resolution professional or liquidator may initiate and conduct proceedings, while the beneficiaries of any recovery are creditors.
“The principal challenge in the context of insolvency proceedings will be to provide a regulatory recognition whereby litigation funding can be integrated into a process which is meant to benefit a body of creditors rather than the actual litigant, which is driving the process,” Singh said.
The commercial viability of such arrangements will also depend on the strength of claims, availability of evidence and prospects of recovering assets.
Funders are also likely to be selective and examine the likelihood of success, the time required to conclude proceedings and whether the respondents have identifiable assets, Akshat Hansaria, partner at 3Sixty Law Group, said.
Special-situations funds, litigation financiers, distressed-asset investors and family offices could explore the opportunity, Hingmire said.
However, the market’s potential will be constrained by delays before the National Company Law Tribunal (NCLT) and appellate tribunals, uncertainty over asset recovery and the possibility of assets being dissipated.
Jain pointed out that tribunals had directed the clawback of only ₹7,931 crore against claims of ₹66,919 crore decided until June 2025. This works out to around 12 per cent, and even this is the amount ordered and not the amount actually recovered, he said.
The legal framework will also have to address who approves funding arrangements, how recoveries are distributed and whether funding costs qualify as insolvency or liquidation expenses.
Experts said the resolution professional or liquidator must retain control over litigation strategy, while funders should not be allowed to dictate settlements or influence decisions that affect creditors.
“Litigation funding should enhance creditor recoveries, not create a parallel decision-making structure operating behind the insolvency process,” he said.
The framework should clearly specify who approves funding, the share investors can receive from recoveries and who controls settlement decisions, particularly where creditors have competing interests, Hansaria said.
“The principle is simple: investors should finance litigation, not control the insolvency process,” Hingmire said.
