Corporate Insolvency Resolution Process Under Insolvency & Bankruptcy Code (IBC) - A Legal Analysis
Author: LawSphereX
Category: Corporate & Insolvency
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CORPORATE INSOLVENCY RESOLUTION PROCESS
UNDER INSOLVENCY & BANKRUPTCY CODE (IBC): A
LEGAL
ANALYSIS
Dr. Irshad Khan, Greater Noida Academy of Legal Studies & Research (GNIOT Group of Institutions), Greater Noida (U.P)
ABSTRACT
Unlike many Western economies that have Triggered eight successive bank failures and Bailouts, India banks remain stable, low inflation, and healthy economic growth. But India also needs more Insolvency and Bankruptcy Code (IBC) does also needs to strengthen the IBC and build more confidence in the Code as the country undergoes economic stability. The IBC also needs to be more time bound and having unified mechanisms that is also time bound to be more efficient to enhance responsiveness challenges and the lack of regulatory discretion within the field of the IBC. IBC also needs more ease of access and removes the bureaucratic obstacles and registration Those marker challenges in the CIRP affecting the Liquidation of CIRP also in any regulatory framework and law. The challenges of having stakeholder engagements remain.
The challenges of high Liquidation of CIRP also should be prioritized. These challenges needs to be taken into following legal frameworks and the interdependence within the Industry and the regulators. Keywords: Insolvency; Bankruptcy; IBC 2016; CIRP; NCLT; Recovery; Restructuring.
1. Introduction
Up until 2016, India was dealing with inefficient and fragmented laws concerning insolvency. Different and outdated laws such as old provisions of company laws, BIFR for sick firms, and laws pertaining to recovery tribunals, were dealing with corporate distress in a fragmented manner. Consequently, insolvency cases took years to resolve and mostly with losses. In 2016, the Insolvency and Bankruptcy Code (IBC) was designed to prioritize coherence and modernize the framework for insolvency in India. Within the 2016 Code, the aim is the resolve insolvency in a within a stipulated time, thereby maximizing the value of the assets and ensuring a fair balance to all stakeholders (Insolvency and Bankruptcy Code, 2016). It was a major shift in the system, changing the debtor friendly system to a creditor driven system.
Under the IBC, once a company defaults on a payment above a specific threshold, the control of the company effectively moves from the existing management to an independent Insolvency Professional, and the creditors will make a joint decision for the future of the company. This shift in paradigm was meant to deal with promoters who unnecessary delayed and complicated the process and to ensure quick resolution. The outcomes of IBC’s implementation became visible within a short time span. As per the World Bank's Doing Business 2020 report, India's position as resolving insolvency improved significantly, suggesting that the outcomes were not only faster, but also more predictable (World Bank 2019). There have been substantial recoveries for banks through the new system as well.
Since the fear of losing control of the business with the default of the debtor under the Corporate Insolvency Resolution Process (CIRP) has been the reason many defaulting debtors have made early payment settlements, this research aims to analyze the legal framework and functioning of the CIRP under the IBC and assess its performance in the context to the IBC.
2. Legislative Framework and Key Concepts
The IBC set up a dedicated institutional framework for insolvency resolution. It established NCLT as the forum for adjudication of corporate insolvencies and created a cadre of Insolvency Professionals (IPs) to run the process under regulation of the Insolvency and Bankruptcy Board of India (IBBI). The Code has an overriding effect on other laws, and it provides critical tools like a moratorium to protect the debtor during resolution. A few key concepts under the IBC are as follows: • Triggering Default: A corporate insolvency process begins on a “default,” defined as the non-payment of a debt when due. Even a single day of default beyond the grace period can trigger CIRP. The default threshold for invocation has been set (and revised) by the government – currently ₹1 crore for corporate debtors. • Financial vs. Operational Creditors: Financial creditors (e. g.
banks and bondholders) form the Committee of Creditors (CoC) and have voting power on decisions, whereas operational creditors (e. g. suppliers, employees, government dues) do not vote in the CoC. This distinction was deliberate, as financial creditors are seen as more equipped to assess restructuring proposals. However, any resolution plan approved must assure operational creditors at least the liquidation value of their claims, providing them some protection. • Creditor-in-Control and Moratorium: Once a CIRP is admitted by NCLT, the existing board and management of the company are suspended. The IRP/RP (Resolution Professional) manages the company as a going concern. Simultaneously, an automatic moratorium (IBC, s. 14) stops all legal actions, enforcement of security, and other proceedings against the company.
This gives the debtor “breathing space” and prevents a chaotic race by creditors that could derail a collective resolution. • Time-Bound Resolution: The IBC prescribes that the entire CIRP should ideally conclude within 180 days, extendable by a one-time extension of 90 days (270 days total). An outer limit of 330 days (including litigation delays) was later added. This emphasis on speed is to preserve asset value – delay is viewed as the enemy of insolvency resolution. Although courts have allowed some flexibility in exceptional cases, the principle of time-bound resolution is central to the Code. • Resolution Plan vs. Liquidation: The primary aim is to approve a resolution plan that keeps the company as a going concern and maximizes creditor recovery. If a viable plan cannot be agreed upon, the fallback is liquidation of the company’s assets.
The IBC establishes a priority waterfall for distributions in liquidation, where secured creditors and workmen rank at the top, and equity holders at the bottom. The expectation, however, is that a good resolution plan will usually yield better returns than liquidation.
3. The CIRP Procedure under IBC
A CIRP can be initiated by a financial creditor, an operational creditor, or by the corporate debtor itself. The applicant files a petition with the NCLT, and if the tribunal is satisfied that a default exists and the application is complete, it admits the case (this is done expeditiously, often within two weeks). Upon admission, the NCLT appoints an Interim Resolution Professional (IRP) and declares the commencement of CIRP. At that moment, the moratorium commences by operation of law. The IRP immediately takes charge of the debtor’s management and assets, replacing the powers of the board of directors. The IRP publicly invites claims from creditors and forms the Committee of Creditors (CoC) comprising all financial creditors. The CoC serves as the decision-making body in CIRP and operates by supermajority vote.
In the first meeting, the CoC can confirm the IRP as the full Resolution Professional (RP) or replace the IRP with another licensed professional of its choice. Thereafter, all important decisions – such as whether to continue the business, raise interim finance, extend the CIRP period, or approve a resolution plan – are made by the CoC (requiring a 66% voting share to pass). The RP’s key task is to find a viable solution for the debtor. The RP prepares an information memorandum (a dossier of the company’s financial and operational details) and invites resolution plans from potential investors. Prospective resolution applicants (which could be other companies, private equity funds, or even the debtor’s promoters if eligible) submit plans that propose how to restructure the debt or revive the company.
After evaluating and negotiating the proposals, the CoC approves a plan by at least 66% vote and submits it to NCLT. If the plan meets legal requirements, the NCLT sanctions it, making it binding on all stakeholders. The company then exits CIRP under the new plan, often with a change in ownership or a restructured balance sheet. If no resolution plan is approved within the permitted time (or if the CoC decides early that the company is not salvageable), the NCLT will order liquidation. In liquidation, a liquidator sells the company’s assets and distributes the proceeds according to the statutory priority order (secured creditors and workmen are paid before unsecured creditors, and equity shareholders last). Liquidation is generally the outcome of last resort, as it usually yields significantly lower recoveries and entails the end of the company as a going concern.
The design of the IBC incentivizes resolution over liquidation wherever possible.
4. Judicial Interpretation and Key Case Law
The Supreme Court of India and NCLAT have played a pivotal role in interpreting the IBC and filling gaps in the law. A number of landmark judgments have shaped the CIRP:
Innoventive Industries (2017): In this case of the Supreme Court, the Court laid down the default requirement precedes the invocation of the IBC, after default is certain the legislation must be insovled. In this initial case, the Court defended the position of precluding the shielding position of a state legislation (Maharashtra relief legislation) and ruled that the IBC being a central legislation must prevail over any state provisions, be it a state legislation for relief. This case provides for the first case of the universal application of the code. • Swiss Ribbons (2019): In yet another Supreme Court case, the Court defended the notion of the code from the multitude of challengEs and also supported the constitutionality of the code as a whole. The Supreme Court applauded the objects of the IBC with the improved recovery, and the time taken, post the IBC.
The Swiss molecules also affirmed the validity of the contoller-in-creditor model. • Essar Steel – Committee of Creditors v. Satish Gupta (2019): This judgement buttressed the importance of the commercial decisions made by CoC. Creditors exercising insolvency resolution must be allowed to distribute the surplus from a resolution plan as they see fit, and the tribunals may not intervene as long as the law permits the distribution, and as long as the orders do not contravene a creditor's priority right. The NCLAT in this case sought to equalize the recoveries amongst all the creditors, but the supreme court upheld the commercial wisdom of the CoC, and permitted differential treatment of secured and unsecured creditors, provided that operational creditors are paid their statutory liquidation value.
The Essar decision was a clear testament to the CoC’s commercial wisdom, limiting the role of NCLT/NCLAT to the legality of the plans. • Pioneer Urban Land & Infrastructure (2019): This case related to homebuyers in real estate insolvencies. After the IBC was amended to include homebuyers as financial creditors, some developers challenged it. The Supreme Court upheld the amendment, including homebuyers in the CoC, thereby giving them representation in the process. The Court acknowledged that advances from homebuyers effectively finance the project and deserve to be treated on par with other financial debts. This was an important development to protect consumers in insolvency cases like those of large real estate firms (e. g. Jaypee Infratech, Amrapali).
Vidarbha Industries (2022): In a slight departure from the earlier strict approach, the Supreme Court in Vidarbha allowed NCLT some discretion at the admission stage even when a default is present. The Court interpreted Section 7(5) of IBC (which uses the word “may” admit) to mean the tribunal is not bound to admit every case if there are good reasons not to. However, it emphasized this should be applied only in exceptional circumstances, as the general rule is that a debtor who has defaulted is not entitled to oppose admission. This decision raised some concerns about reintroducing delays, and subsequent judgments have largely confined Vidarbha to its facts, reaffirming that ordinarily a defaulting company should be admitted into CIRP. Overall, the judiciary has generally bolstered the IBC by resolving ambiguities and ensuring the law’s objectives are met.
The courts have upheld the strict timelines (while allowing minor relaxations in interest of justice), enforced the disqualifications like Section 29A strictly (ArcelorMittal India v. Satish Gupta, 2018), and balanced the interests of stakeholders (as seen in homebuyer-related cases). Legal challenges on constitutional grounds were overcome, and today the IBC stands on firm footing due in no small part to these landmark rulings.
5. Performance of IBC and Emerging Challenges
Achievements: The IBC’s implementation has produced faster and more efficient recoveries than the pre-IBC period. The IBBI has reported that by the end of 2023, financial creditors recovered roughly 30% of their claims in resolved cases, much better than recoveries during the prior legal framework (IBBI 2023). In the more prominent cases (e. g. , Essar Steel, Bhushan Steel, etc. ), creditors recovered more than 60-70% of their claims, which was unprecedented. IBC also resolved insolvencies more quickly. Recovering solvency took 1-2 years, while prior to the IBC, banking institutions spent 4-5 years pursuing recovery while hardly obtaining any solvency. The IBC has also improved credit discipline. Many promoters have settled or restructured their debts before legal thresholds because of the credible threat of insolvency CIRP.
The World Bank reported significant improvements in India’s “resolving insolvency” ranking post-IBC enactment. The IBC framework has improved investor confidence, especially before distressed asset funds and healthier players in the market, who, before the IBC, were reluctant to acquire insolvent firms through open bidding. Delays and Backlogs: Despite the emphasis on timelines, in practice many CIRPs have exceeded the 270-day limit despite the law’s deadlines, which erodes the business’s value and discourages potential investors. The reasons include: overburdened NCLT benches (a large volume of cases and not enough judges to handle them quickly), frequent litigation by erstwhile promoters or disgruntled creditors (appeals and stay orders can consume months), and sometimes tactical delaying by one or other party.
As of mid-2023, a significant number of ongoing CIRPs were running beyond the prescribed timeframes. Delays are problematic because they diminish the remaining value of the debtor’s assets (going-concern businesses can deteriorate if uncertainty persists) and resolution applicants factor in delays as a risk, potentially reducing what they are willing to pay. Liquidation vs. Resolution: A high proportion of cases admitted under IBC have ended up in liquidation rather than resolution. More than twice as many CIRPs have ended in liquidation as in approval of a resolution plan. However, it is important to note that a majority of companies ending in liquidation were defunct or non-operational to begin with (including many legacy cases from the old BIFR regime). In those instances, liquidation was perhaps inevitable. For other cases, the fact that no resolution plan came forward is a concern.
It could be due to lack of investor interest (perhaps the company had little value or too many liabilities) or due to legal uncertainties deterring bidders at the time. When companies go into liquidation, recoveries for unsecured creditors and operational creditors are usually very low (often just a few pennies on the dollar). This outcome underscores the need for bringing companies into the process while they still have value and for making the process as efficient and litigation-free as possible. Operational Creditors and Other Stakeholders: interests have also posed challenges. Operational creditors' influence on the outcome is marginal because they have no voting rights. Some have attempted to contest resolution plans in court, especially when they receive little or no compensation.
The Supreme Court in Essar Steel held that as long as operational creditors receive at least their liquidation value and the plan is not discriminatory, the distribution made by financial creditors is valid. Nevertheless, from a policy perspective, there are discussions on the more equitable treatment, and possibly meaningful involvement, of large operational creditors in the process. Social concerns have also included the insolvency job protection of employees. The Code recognizes employees as operational creditors for unpaid dues, but does not explicitly safeguard their employment. In some resolutions, new owners have retained employees; in others, employees have been let go. The balancing of revival and social impact is still very much a part of the learning curve.
Frequent Amendments and Evolving Law: The IBC has undergone several refinements (2018, 2019, 2020, 2021) in response to issues such as preventing defaulting promoters from bidding (2018's Section 29A), homebuyers being treated as a separate class of creditors, and placing thresholds for large creditor groups to initiate cases (e. g. at least 100 homebuyers must file jointly). Pre-packaged insolvency provisions for small businesses were added in 2021 to streamline and expedite resolutions for MSME. The changes undoubtedly improved the law, but the abundance of amendments also meant rapid adjustments for stakeholders, and in some instances, such as the retrospective application of Section 29A or the homebuyer threshold, default challenges were eventually, and in 2021, upheld by the Supreme Court.
The law’s response to changes and willingness to implement solutions to practical issues, however, are commendable.
6. Reforms and the Way Forward
The corporate insolvency framework as established under the IBC is undergoing developmental changes: • Pre-Pack and MSMEs: The 2021 introduction of pre-packed insolvency for MSMEs permits a debtor to submit a pre-negotiated resolution plan directly for NCLT approval (with creditor approval). This was designed for smaller firms in which the debtor and creditors can negotiate a deal privately, and the formal, time-consuming bidding process is avoided. The pre-pack concept could be extended to other categories of firms and more effective resolution pathways could be established for certain cases. • Thresholds to Curb Abuse: To mitigate abuse and sham insolvency filings, the IBC was amended in 2020 to state that in cases of default by real estate developers, at least 100 allottees or 10 percent of allottees in a project must jointly file to initiate CIRP.
In the same vein, the minimum default to trigger a CIRP was increased to ₹1 crore (from ₹1 lakh). These guidelines focus the process on larger cases and aim to mitigate abuse. Additionally, these changes will stop a small or single creditor driven case from clogging the system. Improving institutional infrastructure for NCLTs and NCLATs has been one of the key priorities going forward. This involves expanding the number of benches and judicial members, providing specialized training in insolvency law, and modernizing systems for the management of cases. Although the government has been gradually enhancing capacity, stakeholders still report backlogs. Admitting and disposing of cases more rapidly will directly resolve delays, which has been a significant issue. • Skilled Insolvency Professionals: Enhancing the quality of Insolvency Professionals (IPs) is another area of focus.
IBBI conducts Exams and continues education mandates for Insolvency Professionals. There are cases where a competent RP is able to hold on to value and efficiently oversee the entire process. On the other hand, there are cases where an underqualified RP can do a subpar job, resulting in a loss of value. Value can be created by setting and communicating competency standards, addressing the problem of unsustained unethical behavior with proportionate corrective action, and perhaps increasing the engagement of specialist turnaround managers. • Cross-Border Insolvency: A significant amount of work is still to be done in framing a Cross-Border insolvency legislation for co-ordination with foreign proceedings, based on the UNCITRAL Model Law. This will be critical in the situation where the debtor has foreign assets and/or foreign creditors.
Once this is completed, Indian courts will be able to recognize foreign insolvency orders and the other way around in a predictable manner, thus allowing seamless cross-border restructurings. You have the option to regularly update the Continuous Availability of Resources according to the IBC to monitor the Responsive Approach of the Government. Further IBC refinements may involve the introduction of specific measures to manage group insolvencies (corporate group defaults), refining the information utilities framework to encompass credit information, and expanding inter-financing provisions to sustain companies during CIRP. The courts will continue in their efforts to determine the applicable law in the numerous grey areas so the process of refining legislation and the courts will improve the IBC over time.
7. Conclusion
India’s stance towards corporate distress is handled distress is handled on orders within a given timely framework which is a shift from the user of the code towards a court-centric antiquated code of conduct. The code is a success in investor confidence, addressing failing businesses, and addressing corporate distress with greater recovery in a timely manner. The code is a success in user confidence, addressing failing businesses, and addressing corporate distress with greater recovery in a timely manner. The code is a success in recovering greater sums and addressing failing businesses with concern judge recoveries. The code is a success in user confidence, addressing failing businesses, and addressing corporate distress with greater recovery in a timely manner.
The code is a success in user confidence, addressing failing businesses, and addressing corporate distress with greater recovery in a timely manner. With the code still in operation, and no magic wand, closed, the code needs the collaboration of institutions RPs and the stakeholders to improve efficiency and reduce value erosion during liquidation. The code is no magic wand and with the code still operational, collaboration from stakeholders and institutions will improve liquidation delays. Pressure on the courts will ease, and complement IBC with a greater focus on distress settlement outside the court, and an improved distress detection mechanism. Resource allocation will improve the efficiency of tribunal processes in addressing delays.
The initiation of a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) signifies a leap forward, and the insolvency landscape is still in the process of maturing. The Code is positioning itself as a pillar of the Indian financial system and will help deepen credit discipline. The reform process is still unfinished, but current implementation indicates that the IBC is capable of modernizing the insolvency framework, and strengthening the credit framework of the economy. The IBC will, in all probability, deepen its credit framework in the following years, and further adjust the overall solvency of the credit economy.
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