Insolvency and Bankruptcy Code (IBC)

Context

As of early 2025, more than eight years since the implementation of the IBC (2016), India has seen a total recovery of ?3.89 lakh crore with a recovery rate of 32.8% under the framework. However, recent judicial interventions like in the Bhushan Power and Steel case and rising concerns over delays and implementation challenges have renewed debates on the efficacy and predictability of the Code.

IBC 2.0: Consolidation or Crisis in India’s Corporate Resolution Framework?

1. Evolution and Objectives of IBC

Purpose of Enactment (2016):
- Consolidated fragmented bankruptcy laws (SARFAESI, RDDBFI, Companies Act provisions).
- Introduced a time-bound resolution mechanism (maximum 330 days including litigation delays).
- Shifted control from debtors to creditors through the Committee of Creditors (CoC).
- Aimed to enhance India’s Ease of Doing Business ranking (improved from 136 in 2016 to 63 in 2020).

2. Key Achievements

Improved Credit Culture:
- As per IBBI, over 30,000 cases were resolved before admission due to the credible threat of IBC.
- SC remarked: “The defaulter’s paradise is lost.”
Dominant Recovery Channel:
- RBI (2024) reports IBC accounted for 48% of all bank recoveries in FY24.
- Recovery under IBC: ?3.89 lakh crore; average realization at 170.1% of liquidation value.
Macro-Impact:
- GNPA ratio declined from 11.2% (March 2018) to 2.8% (March 2024).
- Cost of debt for distressed firms reduced by 3%, as per IIM-Bangalore study.

3. Structural and Operational Challenges

Judicial Bottlenecks:
- NCLT delays in admitting cases and approving resolutions lead to reduced asset value.
- 2758 companies have gone into liquidation vs. 10 resolved.
Post-resolution Uncertainties:
- The Bhushan Steel verdict challenged post-resolution commercial certainty, affecting investor confidence.
- Threat of reversal of approved plans discourages genuine bidders.
Inadequate Tribunal Infrastructure:
- Shortage of technical members, insufficient benches across India.
Ambiguities in Code:
- Lack of clarity on issues like IP rights, treatment of employee dues, and tech asset valuation.

4. Reform Measures and Institutional Suggestions

Tribunal Reforms: Expansion of NCLT benches and appointment of domain experts.
Jurisprudential Clarity: Codify sanctity of CoC-approved plans and limit post-approval judicial interventions.
Pre-Packaged Insolvency: Promote pre-packs especially for MSMEs for faster resolution.
Future-Proofing the Code: Address resolution frameworks for startups, tech firms, and entities with complex IP portfolios.

Way Forward

IBC must balance judicial scrutiny with commercial pragmatism.
There is an urgent need to build legal certainty around resolution outcomes to sustain investor trust.
Establishing time-bound appeals mechanism, incentivizing early distress reporting, and integrating alternate dispute resolution tools can ensure long-term resilience.
As India eyes a $5 trillion economy, a predictable insolvency framework is crucial to uphold financial stability and attract capital.

Insolvency and Bankruptcy Code (IBC), 2016:

1. What is Insolvency?

A situation where a debtor (individual or firm) is unable to pay debts when due.

2. Background and Rationale

Introduced in 2016 based on T.K. Viswanathan Committee Report.
Consolidated and replaced multiple insolvency laws: SARFAESI Act, RDDBFI Act, SICA, and Companies Act provisions.
Aimed to address India’s inefficient debt resolution system and poor NPA recovery.
Enacted to improve India’s Ease of Doing Business ranking.

3. Key Objectives

Time-bound insolvency resolution (180 days, extendable to 330 days).
Maximize value of debtor’s assets.
Promote entrepreneurship and credit discipline.
Provide a unified legal framework for insolvency of companies, partnerships, and individuals.
Protect interests of all stakeholders (creditors, debtors, employees).

4. What is Bankruptcy?

Legal declaration of insolvency by a court.
Initiates a formal process to liquidate or resolve outstanding debts under court supervision.

5. Salient Features of IBC

Single law for insolvency and bankruptcy.
Covers corporates, LLPs, partnerships, and individuals.
Time-bound resolution of insolvency (within 330 days including litigation).
Empowers creditors over debtors through Committee of Creditors (CoC).
Resolution plan requires 66% approval from CoC.
Moratorium imposed on legal proceedings once insolvency begins.

6. Institutional Framework under IBC

Insolvency and Bankruptcy Board of India (IBBI): Regulator of insolvency proceedings and professionals.
Insolvency Professionals (IPs): Administer resolution process, manage debtor’s assets.
Insolvency Professional Agencies (IPAs): Enroll and regulate IPs.
Information Utilities (IUs): Store financial information and credit history of debtors.
Adjudicating Authorities:
- o NCLT for companies and LLPs.
- o DRT for individuals and partnerships.

7. Process of Insolvency Resolution

Initiation: By creditor or debtor before NCLT/DRT.
Moratorium declared and IP appointed.
CoC formed by IP with financial creditors.
CoC evaluates and approves resolution plan (66% votes).
If no plan is approved ? liquidation of assets.

8. Priority Order in Liquidation (Waterfall Mechanism)

Insolvency resolution costs and liquidation costs.
Secured creditors and employee dues (up to 24 months).
Employee wages (up to 12 months).
Unsecured financial creditors.
Government dues and unpaid secured creditors.
Other debts and dues.
Shareholders (equity holders).

PYQ:

"Insolvency and Bankruptcy Code (IBC) has strengthened the creditor rights and has improved the credit culture in India." Analyse. (2021)
"The emergence of the Insolvency and Bankruptcy Code (IBC) is a landmark reform to address the problem of Non-Performing Assets (NPAs) in the banking sector." Evaluate its performance and highlight the challenges ahead. (2020)