Corporate Rescue Vs. Creditor Rights - The Evolving Insolvency Regime In India After The Introduction Of IBC 2016

Author: LawSphereX

Category: Corporate & Insolvency

Published: 2026-08-23T19:01:10.03752+00:00

Updated: 2026-08-26T17:11:37.233+00:00

CORPORATE RESCUE VS. CREDITOR RIGHTS: THE

EVOLVING INSOLVENCY REGIME IN INDIA AFTER THE

INTRODUCTION OF IBC 2016

Ida Patricia, LL.B. (Hons.), O.P. Jindal Global University

ABSTRACT

This paper explores the transformation in India’s Insolvency and Bankruptcy regime with the passage of the Insolvency and Bankruptcy Code 2016. Making a critical engagement with landmark judicial decisions especially Innoventive Industries, Mobilox Innovations, Essar Steel and Devas Multimedia cases its key site for its investigation, it scrutinizes the tension between corporate rescue and creditor rights. The research forms demonstrates that although the IBC has expedited resolution timeframes and enhanced creditor recoveries vis-a-vis earlier regimes, the challenge of balancing the interests of various stakeholders remains. This paper contends that despite judicial reluctance initially, the Indian courts have ultimately, taken direction in accord with the legislative policy of maximization of value in light of the creditor-friendly nature within a time-bound instance.

The research also highlights continuing frictions between financial and operational creditors, and between secured and unsecured creditors. While this paper established that the IBC is considerably better than prior insolvency mechanisms, he said, it offered detailed examples of practical issues that need to be addressed and the need for a balance between corporate rescue and creditor protection. Keywords: Corporate Insolvency, Bankruptcy Code 2016, Creditor Rights, Committee of Creditors, Financial Creditors, Operational Creditors, NCLT, Creditor-in-Control, Cross-Border Insolvency

1. Introduction

The insolvency regime in India witnessed a paradigm shift with the enactment of the IBC. Before the IBC, India's insolvency framework was characterized by multiple laws, including the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 the Companies Act 1956, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. This piecemeal approach led to enormous challenges with excessive delays, value-eroding losses, and a culture of debt default. India ranked 136th out of 189 countries in the World Bank’s Doing Business Report 2016 in the metric ‘resolving insolvency’, which took an average of 4. 3 years. The 25. 7-cent recovery rate for creditors was just over a third of the OECD high income average of 72. 3 cents.

These taxing systemic issues when identifying the need for the IBC were meant to be addressed through a series of consolidation and amendment of laws to the restructuring and insolvency settlement system in a specified timeframe. The IBC itself has a clear statement of its purpose in the preamble: for fostering entrepreneurship, to increase credit availability, and to protect stakeholders interest while optimizing assets value. It was a clear departure from a debtor-inpossession model to one where the creditor is in control, with the basic premise being, that businesses should be rescued as going concerns wherever they remain viable and should otherwise be liquidated if unviable. This shift in paradigm was driven by a more nuanced view that the survival of viable businesses benefits a broader base of stakeholder, including employees, suppliers, customers and the economy as a whole.

The paper studies the dichotomy between corporate rescue and creditor rights in the developing insolvency regime of India. It analyses significant judicial pronouncements that have shaped the interpretation and implementation of the IBC, assesses the efficacy of the new framework in achieving its stated objectives and identifies outstanding challenges and potential reforms. In the context of India’s aspirations for an economically-sound future and its lack of a powerful insolvency regime that tackles corporate malaise and creditor rights expeditiously, this research is most pertinent.

2. Legislative Framework: From Fragmentation to Consolidation

2.1 Pre-IBC Insolvency Regime in India

Prior to the IBC, India’s insolvency framework was fragmented across multiple laws including

the Companies Act, SICA, the RDDBFI Act and SARFAESI. This disjointed approach created jurisdictional conflicts, misaligned legal provisions, emphasis on recovery over resolution and exploitable loopholes that debtors used to stall proceedings. 1 The regime’s ineffectiveness manifested in protracted timelines (7-8 years under SICA) and poor recovery rates (approximately 20% under SARFAESI and 14% under Debt Recovery Tribunals), demonstrating a failure to effectively address corporate distress and protect creditor interests. 2 The ineffectiveness of this regime was evident in several ways. Under SICA, the average time taken for resolution was 7-8 years, with many cases lingering for over a decade. The recovery rate under SARFAESI was approximately 20%, while under the Debt Recovery Tribunals, it was even lower at about 14%.

The extended timelines and poor recovery rates reflected a failure to address the underlying issues of corporate distress effectively.

2.2 The IBC: A Paradigm Shift

The IBC marked a fundamental departure from this fragmented approach. It consolidated and amended the laws governing the reorganization and insolvency resolution of partnerships, individuals, and corporate entities within a specified time – frame. It has introduced multiple key innovations: First, it established a clear and streamlined process for insolvency resolution, with strict timelines. The resolution process was originally required to be concluded within 180 days, extendable by another 90 days with the entire process capped at 330 days, including litigation time. Second, it shifted control from the debtor to creditors during the resolution process. Upon admission of an insolvency application, a moratorium is imposed, resulting in the suspension of board of directors. The Committee of Creditors appoints an insolvency professional, to oversee the corporate debtor.

Third, it brought in a new institutional infrastructure, which includes an adjudicating authority (the NCLT), an appellate authority (the NCLAT), a regulator (the IBBI) and Insolvency Professional Agencies that enrol and regulate insolvency professionals. Fourth, it created a defined pecking order of claims in the event of liquidation, Daisy Roy, Insolvency: Before and after the Insolvency and Bankruptcy Code, iPleaders (2019), https://blog. ipleaders. in/laws-on-insolvency-before-and-after-the-ibc/ (last visited Feb 26, 2025).

2 taxguru_in & Sudipto Bhattacharya, Pre-Packaged Insolvency Resolution Process (PPIRP) under

IBC, TaxGuru (2024), https://taxguru.in/corporate-law/pre-packaged-insolvency-resolution-process-ppirpibc.html (last visited Feb 26, 2025).

with secured creditors at top and unsecured creditors below them and operational creditors generally below financial creditors. The underlying philosophy of the IBC was far more radical. It transitioned away from a debtorin-possession model to a creditor-in-control model, with a broader goal of maximizing asset value and ensuring equitable treatment of all stakeholders. This change was based on the insight that creditor rights enhance the availability of credit while corporate rescue, when feasible, is in the wider economic interest.

3. The Tension Between Corporate Rescue and Creditor Rights

3.1 The Role of the Committee of Creditors

The CoC, comprising financial creditors, is given extensive powers to make commercial decisions, including the approval of resolution plans. This represents a significant departure from the previous regime, where judicial authorities often intervened in commercial matters. The IBC recognizes that creditors, especially financial creditors, possess expertise and incentive to evaluate the debtors viability and make informed decisions about its future. 3 However, this empowerment has raised concerns about the protection of other stakeholders interests. Operational creditors, employees and shareholders have limited say in the resolution process, with their interests being protected primarily through specific provisions in the Code and judicial interventions.

It has spurred discussions on whether the IBC strikes an appropriate balance among conflicting stakeholder interests or has swung too far in favour of financial creditors. 4

4. Landmark Judicial Decisions Shaping the IBC’s Implementation

4.1 Innoventive Industries v. ICICI Bank (2017)

One of the First and most influential decision by the Supreme Court interpreting the IBC was given in the Case of Innoventive Industries against ICICI Bank. This case laid down certain 3 Sudhaker Shukla & Kokila Jayaram, Promoting common good amidst anti-common behaviour of stakeholders: Role of Committee of Creditors, https://www.ibbi.gov.in/uploads/resources/bcb6b096e766e07c164ad5f61ebe2b01.pdf. 4 Especia Associates LLP, Committee of Creditors- Roles, Responsibilities & Functions, Especia Associates LLP (2022), https://especia.co.in/post/committee-of-creditors/ (last visited Feb 26, 2025).

guiding principles which are in place while implementing the IBC.5 The Supreme Court in Innoventive Industries established three crucial principles: First, it confirmed the IBC’s primacy over state laws through the non-obstante clause in Section 238. Second, it simplified the admission process by requiring NCLT to verify only the existence of debt and default, preventing debtors from stalling through procedural defenses. Third, it affirmed the shift from “debtor-in-possession” to “creditor-in-control” while emphasizing the IBC’s broader resolution objective beyond mere debt recovery. This decision established the conceptual foundation for the IBC’s operation, reinforcing creditor control while acknowledging the broader economic purpose of corporate rescue.

4.2 Mobilox Innovations v. Kirusa Software (2017)

The Supreme Court addressed the threshold for admission of operational creditors insolvency applications, interpreting what constitutes a “pre-existing dispute” that can block such applications. The Court adopted a broad interpretation, including not just pending litigation but also any correspondence indicating genuine disputes over debt. This interpretation balanced procedural fairness to debtors against preventing frivolous disputes from derailing legitimate insolvency proceedings. The decision highlighted the structural disadvantage faced by operational creditors in the IBC framework and revealed tensions in balancing different creditor classes interests. The Mobilox decision is particularly significant in understanding how judicial interpretation has shaped the practical operation of creditor rights under the IBC.

4.3 Committee of Creditors of Essar Steel v. Satish Kumar Gupta (2019)

Perhaps the most significant judicial pronouncement on the administration of the IBC was the landmark judgement of the Supreme Court in the case of Essar Steel. This judgement concerns various important issues the standing of the CoC, the differential treatment of various class of creditors and scope of judicial review of CoC’s business decisions. First, the Court gave a ringing endorsement of the commercial wisdom of the CoC and held that the NCLT and NCLAT shall not interfere with the commercial decisions of the CoC unless such decisions are in breach of the fold of the IBC. This only further entrenched the creditor-in-control paradigm and limited judicial participation in commercial matters. Second, the Court dealt with the 5 Summary of first judgment of Supreme Court in Innoventive Industries Ltd. Vs. ICICI Bank & Anr. , in Insolvency and Bankruptcy Code, 2016 – IBC Laws, Ibclaw.

in (2023), https://ibclaw. in/summary-ofinnoventive-industries-ltd-vs-icici-bank-anr-judgment-of-supreme-court/ (last visited Feb 26, 2025).

controversial aspect of distribution of proceeds under a resolution plan. It set aside the NCLAT ruling that financial and operational creditors should be treated alike, saying different classes of creditors could be treated differently on the basis of their security interests and other relevant considerations. It did, however, stress that the treatment must be fair and equitable. Third, the Court reiterated that the purpose of the IBC is to ensure that the corporate debtor functions as a going concern, and that maximization of value is for the benefit of all stakeholders. This highlighted the IBC’s corporate rescue function but under the lens of creditor primacy. 6 The Essar Steel judgement proved pivotal in clarifying the tension between corporate rescue and creditor rights as contemplated under the IBC.

It confirmed the principle of creditor primacy in commercial decision-making, yet stipulated that such decisions must be made to maximize value and to maintain the corporate debtor as an ongoing business, wherever feasible.

4.4 Devas Multimedia v. Antrix Corporation (2023)

A more recent ruling with far-reaching implications for the relationship between corporate

rescue and creditor rights is the Supreme Court’s ruling in Devas Multimedia v. Antrix Corporation. The particular case pertained to the winding up of Devas Multimedia, in the wake of allegations of fraud and corruption in its contract with Antrix Corporation, which is an agency of the government. In this case, a corporate entity (Devas) was found to have conducted its affairs fraudulent and NCLT ordered for winding up of Devas, which led to an appeal before the Supreme Court, and the NCLT's decision was upheld on the grounds that affairs of Devas were conducted in a fraudulent manner and reigned the importance of piercing the corporate veil in palatable cases like fraud. This decision highlighted that the limited liability afforded by the corporate form is not absolute and will be disregarded if a company is being used as an instrument of fraud.

7 6 LawBhoomi, CoC of Essar Steel India Limited v. Satish Kumar Gupta & Ors. [Civil Appeal No. 8766-67 OF 2019], LawBhoomi (2022), https://lawbhoomi. com/coc-of-essar-steel-india-limited-v-satish-kumar-gupta-orscivil-appeal-no-8766-67-of-2019/ (last visited Feb 26, 2025). 7 Simranjeet, [Antrix-Devas Deal] Delhi High Court upholds decision of setting aside ICC Award of $562. 5 million on the ground of fraud |

SCC

Times,

SCC

Times (2023), https://www.scconline.com/blog/post/2023/03/21/antrix-devas-deal-delhi-high-court-upholdsdecision-setting-aside-icc-award-of-562-5-million-on-the-ground-of-fraud-legal-research-updaes-news/ (last visited Feb 26, 2025).

The Devas case highlights the limits of corporate rescue under the IBC. While the IBC generally favors resolution over liquidation, it recognizes that not all businesses deserve to be rescued. When a company's affairs have been conducted fraudulently, liquidation may be the appropriate outcome, even if creditors might recover more through a resolution plan.8

5. Evaluating the IBC's Effectiveness in Balancing Corporate Rescue and Creditor Rights

5.1 Quantitative Analysis

The IBC has undoubtedly improved creditor recovery rates and resolution timeframes compared to the previous regime. According to the IBBI's quarterly newsletter for the period ending September 2023, out of the 2,542 CIRPs that have been closed, 740 have resulted in a resolution plan, 1,228 have ended in liquidation, and the rest have been settled or withdrawn. For cases resolved through a resolution plan, the average recovery rate has been around 43%, significantly higher than the 25. 7% recovery rate under the pre-IBC regime. However, this average masks significant variations, with some cases like Essar Steel yielding 90% recovery, while others yield much less. 9 The average time taken for resolution has also improved, with CIRPs that have yielded resolution plans taking an average of 460 days, excluding the time spent in litigation.

This is still longer than the prescribed timeline of 330 days, but a significant improvement over the 7-8 years under SICA or the 4. 3 years estimated by the World Bank in

2016. However, it's worth noting that the majority of CIRPs that have been closed have ended

in liquidation rather than resolution. This raises questions about whether the IBC is effectively achieving its objective of corporate rescue. Critics argue that the high rate of liquidation suggests a bias towards creditor recovery rather than business rescue.10

6. Ongoing Challenges and Potential Reforms

6.1 Balancing Different Creditor Interests

One of biggest areas of contention regarding the implementation of the IBC has been in Jus Mundi, Devas v. Antrix, Judgment of the Delhi High Court, Mar 2023, Jusmundi.com (2023), https://jusmundi.com/en/document/decision/en-devas-multimedia-private-limitedv-antrix-corporation-limited-judgment-of-the-delhi-high-court-friday-17th-march-2023 (last visited Feb 26, 2025). taxguru_in & Bhatt, Rescue Financing in View of

IBC,

2016: Success, Difficulties and Motives, TaxGuru (2024), https://taxguru.in/corporate-law/rescue-financing-view-insolvency-bankruptcy-code- 2016-success-difficulties-motives.html#google_vignette (last visited Feb 26, 2025). 10 wasim, Effectiveness of IBC, 2016 - A Performance Appraisal of IBC, Free UPSC IAS Preparation Syllabus and Materials For Aspirants (2024), https://forumias.com/blog/effectiveness-of-ibc-2016-a-performanceappraisal-of-ibc/ (last visited Feb 26, 2025).

identify common ground among classes of creditors. The overarching consideration afforded to financial creditors, especially secured creditors, has often resulted in operational creditors receiving little or no recovery. This has resulted in criticism that banks and financial institutions were given precedence under the IBC at the expense of trade creditors, employees, and other operational stakeholders. The IBC has been amended recently to address this imbalance. For example, one of the key changes brought about by the 2019 amendment was the introduction of minimum payment thresholds for operational creditors under a resolution plan, such that they had to be paid at least the liquidation value or the amount they would have received if the proceeds were allocated as per the waterfall prescribed in Section 53 of IBC, whichever is higher.

As operational creditors fall down the waterfall, this hasn’t gone anywhere to improving their position. One possible reform could be around increasing the sway of operational creditors in the resolution process, maybe by getting representation for them on the CoC but with say so that they have limited voting rights. Another solution could be that the law could prescribe a reasonably equitable distribution of proceeds realised under the resolution plan so that operational creditors in particular are not left without their proportion of the pie, if the resolution value vastly surpasses the liquidation value.

6.2 Addressing the deferments in the Resolution Framework

While the IBC aims for swift resolution, the process scoffs at time-bound resolution. These delays arise from multiple factors, such as capacity constraints at NCLT and NCLAT, litigation by stakeholders and practical difficulties in observing even basic merits in finding resolution applicants. There are multiple reforms that could remedy these delays. There are three broad recommendations which are as follows - First, the capacity of the NCLT and NCLAT needs to be strengthened, with more members and better infrastructure. Second, the IBC framework could also benefit from stronger enforcement of the timelines specified under it and penalties for the delays caused by frivolous litigation. Third, the pre-pack insolvency resolution process for MSMEs could be expanded to larger firms as well as a speedier and more effective

alternative to the regular CIRP.11

6.3 Enhancing Corporate Rescue Mechanisms

It should be noted that although the IBC is an improvement over the previous regime, the rate of liquidation remains high. This movement means that there are additional needs for more effective mechanisms to enable business rescue, particularly for companies that remain viable but simply find themselves in distress. Maybe reform could be made to the pre-insolvency restructuring framework which allows us to prevent companies collapse before reaching the insolvency stop. This could, of course, involve formal mechanisms for debt restructuring with the participation of all creditors, alter ego of the UK’s Scheme of Arrangement or the EU’s Preventive Restructuring Framework. A second reform could be to create an intermediate debtor-in-possession type regime for certain categories of case, such as those where the management is not culpable for the company’s financial malaise.

This might encourage filing early and increase the potential for successful restructuring.

6.4 Cross-Border Insolvency Framework

The IBC's current approach to cross-border insolvency remains underdeveloped compared to international standards. While Sections 234 and 235 of the IBC technically provide for government agreements with foreign countries and letters of request to foreign courts, these provisions have not been operationalized effectively. This gap becomes increasingly problematic as Indian businesses expand globally, and foreign investors increase their presence in the Indian market. The Insolvency Law Committee’s 2018 report recommended adopting the UNCITRAL Model Law on Cross-Border Insolvency with certain modifications, but implementation has been delayed. Recent cases highlight this gap in the framework. In Jet Airways (India) Ltd. v. State Bank of India & Anr.

(2021), the NCLAT grappled with recognizing proceedings in the Netherlands without a comprehensive legislative framework to guide the process. The UK's implementation of the UNCITRAL Model Law through the Cross-Border Insolvency Regulations 2006 offers a clear template. Their framework provides for automatic recognition Rachit Garg, All about the National Company Law Appellate Tribunal

(NCLAT)

iPleaders, iPleaders (2024), https://blog.ipleaders.in/all-about-the-national-company-law-appellate-tribunalnclat/ (last visited Feb 26, 2025).

of foreign main proceedings, stays on local actions, and empowers foreign representatives to participate in local proceedings. This creates predictability for creditors and businesses operating across jurisdictions. India's proposed Cross-Border Insolvency Resolution framework would similarly establish the concept of "center of main interests" (COMI) to determine the primary jurisdiction, provide for recognition of foreign proceedings, and establish cooperation mechanisms between courts and insolvency professionals. These reforms would address current challenges of jurisdictional conflicts, parallel proceedings, and inconsistent treatment of creditors across borders.

The absence of a robust cross-border framework particularly affects financial creditors with security interests across multiple jurisdictions, who currently face uncertainty about the enforceability of resolution plans outside India. This gap undermines the IBC's fundamental objective of maximizing asset value for all stakeholders. The COVID-19 pandemic has accelerated business failures with cross-border dimensions, making this reform increasingly urgent. Recent discussions between Indian authorities and countries like the UK, Singapore, and the US regarding bilateral arrangements highlight growing recognition of this need but fall short of the comprehensive solution that adopting the Model Law would provide.

7. Conclusion

The IBC has transformed India’s insolvency regime by unifying fragmented laws, establishing creditor control, and implementing time-bound processes. This has yielded better recovery rates and improved credit culture, though challenges persist in balancing financial and operational creditor rights and addressing high liquidation rates. Key judicial decisions like Innoventive Industries, Mobilox, Essar Steel and Devas Multimedia have reinforced creditor primacy while emphasizing value maximization and corporate rescue when viable. India must address urgent reforms regarding creditor interests, procedural delays, rescue mechanisms, and cross-border frameworks. Despite its imperfections, the IBC represents a crucial advancement toward a modern insolvency system that supports economic growth and entrepreneurship.