We study the impact of a bankruptcy reform that improved creditor rights and legal efficiency on the tunnelling of funds through related party transactions within corporate group in India. We exploit a triple difference estimation strategy comparing related party transactions between a ‘treatment’ and ‘control’ group of financially distressed firms, before and after reform, and in Indian states where court systems were less efficient relative to other states. Improved creditor rights reduced tunnelling by inducing borrowers to willingly cut back on bank debt, financial related party transactions, and dividend payouts.