Insolvency and Bankruptcy Code (IBC): Successes & Challenges

Context (TH): IBC has strengthened debt recovery and credit discipline in India, but judicial delays and legal uncertainties still challenge its effectiveness.

About Insolvency and Bankruptcy Code (IBC)

IBC seeks to create a unified framework to resolve insolvency and bankruptcy in India.
Objective: To resolve the bankruptcy crisis in the corporate sector, consolidate insolvency and bankruptcy proceedings, and revive the company in a time-bound manner.
It is applicable to Individuals, Corporates, Partnerships, Limited Liability Partnerships, and personal guarantors to corporate debtors.
Adjudicating authority: National Companies Law Tribunal (NCLT) for companies and LLPs and Debt Recovery Tribunals (DRTs) for individuals and Partnership firms.
It provides for a time-bound process for resolving the insolvency of corporate debtors called the corporate insolvency resolution process (CIRP).

Insolvency proceedings can be initiated either by the creditor (banks) or the loaner (defaulter).
It is done by submitting a plea to the adjudicating authority, the National Companies Law Tribunal (NCLT).
On acceptance of the plea, an Insolvency Resolution Professional is appointed.
The power of management and board is transferred to the Committee on Creditors (CoC) (includes all financial creditors of a corporate debtor).
The CoC will appoint and supervise the Insolvency Professional.

Insolvency Professionals (IPs): To conduct the resolution processes. These IPs will be members of Insolvency Professional Agencies (IPAs).
Information Utilities (IUs): To collect/disseminate information to facilitate insolvency resolution.
Regulator: Insolvency and Bankruptcy Board of India (IBBI) to regulate the functioning of IPs, IPAs and IUs.
Adjudicators: For companies, the National Company Law Tribunal (NCLT) will adjudicate insolvency resolutions. For individuals, the Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution.
Committee of Creditors (CoC): It consists of financial creditors who will appoint and supervise the actions of IPs and approve the resolution plan.

It was established under the Insolvency and Bankruptcy Code, 2016.
Nodal Ministry: Ministry of Corporate Affairs.
It has regulatory oversight over Insolvency Professional Agencies (IPA), Insolvency Professionals (IP), and Information Utilities (IU).

They are those lenders whose relationship with the entity is a pure financial contract, such as an extension of loan, guarantees, or debt security.
Under IBC, only Financial creditors are permitted to vote in the meetings of the Committee of Creditors (CoC).

It refers to those who have provided goods or services or employment, and the payment for same is due from the corporate debtor.

The Insolvency and Bankruptcy Code (Amendment) Act, 2021 amended the Insolvency and Bankruptcy Code, 2016.
It introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
Unlike CIRP, PIRP may be initiated only by debtors.
The debtor should have a base resolution plan in place.
During PIRP, the management of the company will remain with the debtor.

It was introduced in 2021 through an amendment to IBC in the wake of COVID-19 to deal with the stress of small and medium-sized entrepreneurs.
Eligibility: MSMEs, other eligible non-MSME corporate debtors.

It provides for a debtor-driven process, unlike the traditional corporate insolvency resolution process.
Under this, the debtor and creditors work together to negotiate and agree upon a restructuring plan before formally initiating the insolvency process.
It provides for continuity of business operations by allowing the debtor to continue running its operations.

Shift in Borrower Behaviour: Promoters now avoid defaults to prevent insolvency, preserving control and reputation.
Improved Credit Discipline: Enhanced repayment and early resolution have helped reduce Gross NPAs from 11.2% (FY18) to 2.8% (FY24).
Better Corporate Governance: Resolved firms show more independent directors, professional management, and improved compliance (IIM-B study).
Lower Cost of Credit: Clean balance sheets and restructuring post-IBC reduce lenders’ risk, leading to a 3% average drop in borrowing costs for stressed firms.

Dominant Recovery Channel: IBC accounted for 48% of total bank recoveries (SARFAESI (32%), Debt Recovery Tribunals (17%), & Lok Adalats (3%)) in FY 2023–24, making it the largest recovery mechanism for banks. Also, realisation exceeds 170% of the liquidation value.
High Pre-admission Settlements: 30,310 cases were settled before formal admission to insolvency proceedings (Dec 2024), covering defaults worth ₹13.78 lakh crore, reflecting the deterrent effect of IBC.
Comparatively Speedier resolution: The Standing Committee on Finance report (2021) noted that the time taken to resolve insolvency has reduced from 4.3 years to 1.6 years between 2017 and 2020.
Attracting foreign investment due to improved investor confidence by providing improved recovery prospects.
Promoting a creditor-centric approach by providing a clear hierarchy of claims to be settled and providing a structured mechanism for the resolution process.
Promoting a culture of entrepreneurship by providing exit mechanisms for failed businesses and encouraging entrepreneurs to take calculated risks.

Delayed resolution: Despite Committee of Creditors (CoC) approval, resolution is often delayed due to insufficient judicial capacity.
- 78% of ongoing Corporate Insolvency Resolution Process (CIRP) cases exceeded the mandated 270-day timeline as of March 2025 (ICRA report).
Post-resolution legal uncertainty: Even after the resolution plan is approved and implemented, stakeholders often initiate legal challenges.
Framework gaps for emerging business models: IBC lacks provisions to handle complexities in new-age firms, resulting in poor resolution outcomes for start-ups and tech-driven enterprises.
Unaddressed aspects: Valuation and transfer of IPR, treatment of employee dues, and ensuring technology continuity (e.g., licenses, data access) remain unresolved in the IBC framework for start-ups.

Expand NCLT/NCLAT capacity: Appoint more members, digitise operations, & modernise case handling.
Legal Finality & Predictability: Codify safeguards to protect approved resolution plans from endless litigation. Build judicial consensus on upholding commercial decisions of Committee of Creditors (CoC).
Pre-Packaged Insolvency & Sectoral Frameworks: Promote pre-packs for MSMEs and startups. Introduce sector-specific norms for resolution of IPR-based and tech-intensive firms.
Investor Assurance Mechanisms: Provide legal clarity and regulatory assurance to boost investor confidence in resolution outcomes.