Strengthening Core Principles of Insolvency and Bankruptcy Code (IBC)

Syllabus: GS3/Economy

Context

• Recent developments suggest that the effectiveness of the Insolvency and Bankruptcy Code (IBC) is under strain, with concerns about delays, judicial interventions, and deviations from its original intent.

About the Insolvency and Bankruptcy Code (IBC) in India

• It was enacted in 2016, designed to consolidate and streamline the insolvency resolution process in India.
• It replaced a fragmented legal framework with a unified, time-bound mechanism aimed at improving the ease of doing business and strengthening creditor rights.

Evolution of the IBC

• Mechanisms prior to the IBC were often slow and ineffective, leading to mounting Non-Performing Assets (NPAs) and eroding lender confidence. These include:
  • The Sick Industrial Companies Act (SICA);
  • The Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI), and
  • The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI).

Core Principles of IBC

• Time-Bound Resolution: The IBC mandates that insolvency cases be resolved within a strict timeline—180 days, extendable to 330 days in exceptional cases.
  • It ensures that value erosion of assets is minimized and economic activity is restored quickly.
• Creditor-in-Control Model: IBC empowers creditors to take charge of the resolution process, unlike earlier frameworks where debtors retained control.
  • It has improved credit discipline and borrower accountability.
• Maximization of Asset Value: IBC emphasizes maximizing the value of assets during resolution, whether through restructuring or liquidation.
  • It ensures that stakeholders recover the highest possible value from distressed assets.
• Equitable Treatment of Stakeholders: IBC provides a structured hierarchy for claim settlement, ensuring fair treatment of financial and operational creditors.
  • The Supreme Court has upheld this structure in key rulings like Essar Steel.
• Promoting Entrepreneurship and Fresh Start: IBC encourages entrepreneurial risk-taking and allows for a ‘fresh start’ without long-term stigma, by offering a clean exit to failed businesses.
• Institutional Support and Transparency: Institutions like the Insolvency and Bankruptcy Board of India (IBBI) and National Company Law Tribunal (NCLT) play a central role in ensuring transparency, accountability, and consistency in the resolution process.
  • NCLT aims to adjudicate insolvency resolutions for companies.
  • Debt Recovery Tribunal (DRT) aims to adjudicate insolvency resolutions for individuals.

Present Status

• Over 30,000 cases involving defaults worth ₹13.8 trillion were settled before formal admission, and creditors have recovered around 32.8% of their claims through the process.

Challenges Facing the IBC

• Delays in Resolution Process: Despite the IBC’s mandate for time-bound resolution, cases often exceed the 330-day limit, with some taking over 717 days to close.
  • It erodes asset value and discourages investor confidence.
• Declining Corporate Insolvency Resolution Cases: The number of insolvency cases initiated under the IBC has declined significantly, from 1,262 cases in FY23 to 723 cases in FY25.
• Low Recovery Rates for Creditors: Creditors have recovered only 31-32% of their claims in recent years.
• Judicial and Regulatory Challenges: Frequent Supreme Court interventions have altered the resolution landscape, sometimes reopening settled cases.
  • Additionally, regulatory uncertainties and inconsistent tribunal rulings have created unpredictability in insolvency proceedings.
• Institutional Capacity Issues: NCLT has struggled with vacancies, affecting the speed of case resolutions.
  • While recent efforts have improved staffing, the backlog remains a concern.
• Shift in Creditor Preferences: Financial creditors are increasingly exploring alternative mechanisms like securitization of stressed assets instead of referring cases to the IBC.

Path Forward

• Timely Resolution: Cases must be processed within the prescribed timelines to maintain investor confidence.
• Creditor Rights Protection: The original framework prioritizing creditor claims should be upheld.
• Judicial and Executive Alignment: Courts and regulators must work in harmony to preserve the IBC’s intent.

Source: BS