Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive and unified legislation enacted to consolidate and amend laws relating to insolvency, reorganisation, and bankruptcy in India. It provides a time-bound and transparent framework for resolving insolvency of companies, limited liability partnerships (LLPs), partnerships, and individuals.
The Code represents a landmark reform in India’s financial and legal architecture, aimed at promoting creditor confidence, business continuity, and ease of doing business by ensuring faster recovery of debt and efficient asset utilisation.

Background and Need for the Code

Before the enactment of the IBC, India had a fragmented insolvency framework governed by multiple laws, including:

• The Companies Act, 1956, for corporate liquidation.
• The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI).
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).

These laws led to overlapping jurisdictions, procedural delays, and poor recovery rates. According to the World Bank’s Doing Business Report (2015), insolvency resolution in India took over four years on average, with recovery rates of less than 25 per cent.
To address these inefficiencies, the Bankruptcy Law Reforms Committee (BLRC), chaired by Dr. T. K. Viswanathan, recommended the creation of a single, unified insolvency framework. Based on these recommendations, the Insolvency and Bankruptcy Code was enacted and came into force on 28 May 2016.

Objectives of the Insolvency and Bankruptcy Code

The IBC aims to establish a modern and effective insolvency resolution system with the following objectives:

• Consolidation of insolvency laws into a single framework.
• Time-bound resolution of insolvency cases (generally within 180 days, extendable to 330 days).
• Maximisation of asset value of insolvent entities.
• Promotion of entrepreneurship and availability of credit.
• Balancing the interests of all stakeholders (creditors, debtors, and employees).
• Facilitating the exit mechanism for businesses in financial distress.

The Code is based on the principle of creditor-in-control, replacing the earlier debtor-in-possession model, thereby empowering creditors to make key decisions in insolvency resolution.

Institutional Framework

The IBC established a four-tier institutional structure for efficient functioning and oversight:

1. Insolvency and Bankruptcy Board of India (IBBI):
   • Acts as the regulatory authority for insolvency professionals, agencies, and information utilities.
   • Frames regulations, monitors compliance, and ensures standardisation of practices.
2. Insolvency Professionals (IPs) and Insolvency Professional Agencies (IPAs):
   • IPs manage the resolution process, take control of debtor assets, and conduct meetings of creditors.
   • IPAs regulate and certify insolvency professionals.
3. Information Utilities (IUs):
   • Maintain electronic databases of financial information such as debts, defaults, and security interests.
   • Facilitate verification of claims during insolvency proceedings.
4. Adjudicating Authorities (AAs):
   • National Company Law Tribunal (NCLT): Adjudicates insolvency cases for companies and LLPs.
   • Debt Recovery Tribunal (DRT): Handles insolvency cases for individuals and partnerships.

Appeals against NCLT orders lie with the National Company Law Appellate Tribunal (NCLAT), and further appeals can be made to the Supreme Court of India.

Process of Insolvency Resolution

The Code provides a structured and time-bound process for resolving insolvency.

(A) Corporate Insolvency Resolution Process (CIRP)

1. Initiation:
   • Initiated by a financial creditor, operational creditor, or the corporate debtor itself in case of default of ₹1 crore or more (threshold as revised in 2020).
2. Admission and Moratorium:
   • Upon admission by the NCLT, a moratorium period is declared, halting all legal proceedings and recovery actions against the debtor.
3. Appointment of Interim Resolution Professional (IRP):
   • IRP takes control of the company’s management, collects information, and constitutes a Committee of Creditors (CoC).
4. Committee of Creditors (CoC):
   • Comprises all financial creditors of the debtor.
   • CoC decides on key matters, including the appointment of a Resolution Professional (RP) and approval of a resolution plan.
5. Resolution Plan:
   • Prospective resolution applicants (investors or acquirers) submit plans to revive the company.
   • The CoC must approve a plan with at least 66 per cent voting share.
   • Once approved by the NCLT, the plan becomes binding on all stakeholders.
6. Liquidation:
   • If no plan is approved within 330 days, the entity proceeds to liquidation.
   • Assets are sold, and proceeds distributed in accordance with the waterfall mechanism under Section 53 of the IBC.

(B) Insolvency for Individuals and Partnerships

• The process is similar but adjudicated by Debt Recovery Tribunals (DRTs).
• It includes stages of fresh start, repayment plan, and bankruptcy order.

Priority of Claims (Waterfall Mechanism)

In liquidation, the proceeds are distributed in the following order of priority:

1. Insolvency resolution and liquidation costs.
2. Secured creditors and workmen’s dues (up to 24 months).
3. Employee wages (up to 12 months).
4. Unsecured creditors.
5. Government dues and remaining secured creditors.
6. Shareholders and partners (if any residual funds remain).

This ensures transparency and fairness in debt recovery.

Key Features and Innovations

• Time-bound resolution: Mandatory completion of insolvency proceedings within 330 days, including litigation.
• Creditor-driven process: Financial creditors gain control over decision-making.
• Moratorium protection: Safeguards the debtor’s assets during proceedings.
• Cross-border insolvency framework: Based on the UNCITRAL Model Law (pending full adoption).
• Operational creditor protection: Ensures fair treatment of suppliers and service providers.
• Information transparency: Through Information Utilities, improving verification of debt claims.

Amendments and Reforms

Since its enactment, the IBC has undergone several amendments to enhance efficiency and inclusiveness:

• 2017 Amendment: Extended the Code to include personal guarantors to corporate debtors.
• 2018 Amendment: Introduced homebuyers as financial creditors.
• 2019 Amendment: Set strict timelines for resolution and empowered the Insolvency and Bankruptcy Board of India (IBBI).
• 2020 Amendment: Raised the default threshold for initiation from ₹1 lakh to ₹1 crore to protect small businesses; introduced pre-packaged insolvency resolution for MSMEs.
• 2021–22 Developments: Promoted digital hearings, simplified cross-border insolvency rules, and strengthened liquidation processes.

Achievements and Impact

The IBC has transformed India’s credit and business landscape:

• Improved Recovery Rates: Average recovery increased from less than 25 per cent pre-IBC to around 45 per cent in initial years.
• Reduced Resolution Time: Insolvency cases are now resolved faster compared to the pre-IBC regime.
• Enhanced Credit Discipline: Borrowers are more cautious due to the threat of insolvency proceedings.
• Attracted Global Investors: Several distressed assets have been acquired by domestic and foreign investors, improving asset utilisation.
• Improved Ease of Doing Business: India’s ranking in the World Bank’s Resolving Insolvency parameter improved significantly after IBC implementation.

Challenges and Concerns

Despite its success, the IBC faces certain challenges:

• Judicial delays: Heavy caseloads in NCLT lead to time overruns.
• Capacity constraints: Limited number of insolvency professionals and adjudicators.
• Haircuts for creditors: In some cases, creditors have faced steep losses (e.g., large write-offs in high-profile cases).
• Frequent litigation: Appeals and legal complexities delay final outcomes.
• Need for Cross-Border Clarity: Global insolvency mechanisms still underdeveloped in India.

Role in Economic Reform

The IBC represents a cornerstone of India’s structural economic reforms. It has strengthened the financial system by:

• Promoting a creditor-friendly environment.
• Reducing non-performing assets (NPAs).
• Encouraging entrepreneurial risk-taking through an efficient exit mechanism.
• Enhancing foreign investor confidence in India’s legal and financial institutions.