Legal Challenges In Corporate Bankruptcy And Insolvency Proceedings In India - A Critical Analysis

Author: LawSphereX

Category: Corporate & Insolvency

Published: 2026-08-23T20:29:50.736553+00:00

Updated: 2026-08-26T17:10:43.985+00:00

LEGAL CHALLENGES IN CORPORATE BANKRUPTCY

AND INSOLVENCY PROCEEDINGS IN INDIA: A CRITICAL

ANALYSIS

Julit Susan Easo, Christ (Deemed To Be University), Bangalore

ABSTRACT

Corporate bankruptcy and insolvency laws are crucial for maintaining economic stability, protecting creditors, and ensuring efficient resolution of distressed businesses. These laws provide a structured mechanism for handling financial distress, preventing economic disruptions, and fostering investor confidence. In India, the Insolvency and Bankruptcy Code (IBC), 2016, was introduced as a landmark reform to streamline and expedite insolvency proceedings by consolidating multiple existing laws under a single framework. The IBC was designed to provide a time-bound resolution process, promote creditor-driven recovery mechanisms, and enhance the ease of doing business in the country. However, despite its progressive framework, the implementation of the IBC has encountered numerous legal and procedural challenges.

Persistent delays in insolvency resolution, excessive judicial interventions, and a heavy backlog of cases in the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) have undermined its effectiveness. Additionally, conflicts among stakeholders, including financial and operational creditors, promoters, and resolution professionals, have led to prolonged litigation and uncertainty in the resolution process. Regulatory ambiguities, frequent amendments, and evolving judicial interpretations have further added to the complexity of corporate insolvency proceedings in India. This paper critically examines the key legal hurdles affecting corporate bankruptcy and insolvency proceedings in India, with a focus on systemic inefficiencies, inconsistencies in judicial decisions, and challenges in implementing a uniform insolvency resolution mechanism.

Furthermore, it evaluates the effectiveness of recent amendments to the IBC and landmark judicial rulings in addressing these issues. By analyzing case laws, regulatory developments, and global best practices, this study aims to provide insights

into potential reforms that could enhance the efficiency and effectiveness of corporate insolvency resolution in India. Keywords: Bankruptcy, insolvency, NCLAT, IBC, SARFAESI

INTRODUCTION

Corporate insolvency and bankruptcy proceedings play a vital role in a nation's financial ecosystem by providing a structured mechanism for resolving distressed businesses. 1 A well-functioning insolvency framework ensures timely resolution of financially troubled firms, protects the interests of creditors, and fosters economic growth by promoting responsible business practices. 2 An efficient insolvency resolution mechanism also enhances investor confidence, facilitates credit availability, and contributes to the overall stability of the financial sector. 3 Without an effective insolvency framework, prolonged financial distress can lead to economic stagnation, loss of employment, and erosion of stakeholder value.

4 Prior to the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, India's insolvency regime was highly fragmented, relying on multiple legislations such as the Companies Act, 1956 and 2013, the Sick Industrial Companies (Special Provisions) Act,

1985 (SICA), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993,

and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The multiplicity of laws led to significant inefficiencies, prolonged resolution timelines, and a lack of a cohesive approach to insolvency management.5 The involvement of multiple adjudicating authorities further complicated the process, leading to jurisdictional conflicts and unpredictable outcomes. The introduction of the IBC was a landmark reform aimed at creating a unified legal 1 Bose, U., Filomeni, S. and Mallick, S., 2021. Does bankruptcy law improve the fate of distressed firms? The role of credit channels. Journal of Corporate Finance, 68, p.101836. 2 Das, A., Agarwal, A.K., Jacob, J., Mohapatra, S., Hishikar, S., Bangar, S., Parekh, S., Basu, S. and Sinha, U.K.,

2022. Insolvency and bankruptcy reforms: the way forward. Vikalpa, 45(2), pp.115-131.

3 Sengupta, R. and Sharma, A., 2016. Corporate Insolvency Resolution in India: Lessons from a cross-country comparison. Economic and Political Weekly, pp.37-46. 4 Sengupta, R. and Sharma, A., 2016. Corporate Insolvency Resolution in India: Lessons from a cross-country comparison. Economic and Political Weekly, pp.37-46. 5 Handa, A., 2020. An analysis of the corporate insolvency resolution process as a route for acquisitions in India. International Insolvency Review, 29(2), pp.234-253.

framework to address corporate distress in a structured and time-bound manner. 6 The code introduced a streamlined Corporate Insolvency Resolution Process (CIRP) and a Liquidation Process, offering a comprehensive legal mechanism to resolve financial distress. 7The primary objectives of the IBC include maximizing the value of assets, ensuring equitable treatment of creditors, and promoting the revival of financially viable businesses while facilitating the exit of unviable firms in an orderly manner. 8 The IBC also empowers creditors through the Committee of Creditors (CoC), giving them a decisive role in the resolution process. However, despite its ambitious objectives, the implementation of the IBC has been fraught with several challenges.

9 Procedural bottlenecks, judicial delays, inconsistent interpretations, and stakeholder conflicts have hindered the swift resolution of insolvency cases. 10 Many cases have exceeded the stipulated resolution timelines of 180 days (extendable to 330 days), leading to protracted litigation and uncertainty. The overburdened National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) struggle with a growing backlog of cases, further exacerbating delays in insolvency proceedings. Moreover, frequent amendments to the IBC and evolving judicial precedents have added to the complexity of the legal landscape. 11 While amendments aim to address emerging challenges and strengthen the framework, they often create uncertainty among stakeholders due to shifting legal interpretations.

Additionally, conflicts between financial and operational creditors, disputes over asset valuation, and promoter-driven litigation have made insolvency resolution more contentious12. Furthermore, the lack of a comprehensive

6 Valecha, J. and Xalxo, A.A., 2017. Overview of the Insolvency and Bankruptcy Code, 2016 & the

Accompanying Regulations. Journal on Contemporary issues of Law, 3.

7 Valecha, J. and Xalxo, A.A., 2017. Overview of the Insolvency and Bankruptcy Code, 2016 & the

Accompanying Regulations. Journal on Contemporary issues of Law, 3.

8 GUPTA, A., 2018. Insolvency and bankruptcy code, 2016: a paradigm shift within insolvency laws in

India. The Copenhagen Journal of Asian Studies, 36(2), pp.75-99. 9 Goel, S., 2017. The Insolvency and Bankruptcy Code, 2016: Problems & Challenges. Imperial Journal of Interdisciplinary Research (IJIR), 3, pp.2454-1362. 10 Goel, S., 2017. The Insolvency and Bankruptcy Code, 2016: Problems & Challenges. Imperial Journal of Interdisciplinary Research (IJIR), 3, pp.2454-1362.

11 Arora, P. and Saurabh, S., 2022. Predicting distress: A post insolvency and bankruptcy code 2016

analysis. Journal of Economics and Finance, 46(3), pp.604-622. 12 AlRawashdeh, S.Z.Y., 2021. The Insolvency and Bankruptcy Code: A Brief Review. Asian Journal of Law and Governance, 3(3), pp.15-18.

framework for cross-border insolvency continues to pose challenges in cases involving multinational corporations with assets and liabilities spread across jurisdictions. This paper critically analyzes the key legal obstacles that continue to impede the effectiveness of corporate insolvency proceedings in India. It examines judicial intervention, regulatory ambiguities, stakeholder conflicts, and procedural inefficiencies that affect insolvency resolution. Additionally, it evaluates the effectiveness of recent amendments and landmark judicial decisions in addressing these challenges. By drawing comparisons with global best practices, this paper explores potential reforms and policy measures that could enhance the efficiency and predictability of India's insolvency resolution framework, ultimately fostering a more robust corporate recovery mechanism.

EVOLUTION OF CORPORATE INSOLVENCY LAWS IN INDIA

Before the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, corporate insolvency in India was governed by a fragmented and inefficient legal framework. Various laws dealt with different aspects of insolvency, leading to delays, jurisdictional conflicts, and lack of coordination among stakeholders. Some of the key legislations that governed corporate insolvency prior to the IBC include:

1. The Companies Act, 1956 (provisions for winding up companies)

Under the Companies Act, 1956, the winding-up of a company could be initiated through three primary methods such as the compulsory winding up by the Court, voluntary winding up, and winding up under the supervision of the Court. In the case of compulsory winding up, the High Court had the jurisdiction to wind up a company on various grounds, such as the company’s inability to pay debts, passing of a special resolution for winding up by shareholders, acting against national interests, engaging in fraudulent activities, or ceasing business operations for an extended period, rendering it defunct. The process was initiated through a petition filed by creditors, shareholders, or regulatory authorities. This led to an extensive judicial process where the Court appointed an official liquidator to oversee the liquidation of assets and settlement of liabilities.

On the other hand, voluntary winding up allowed companies to dissolve themselves without

court intervention by passing a special resolution. If the company was solvent and able to pay its debts in full, the process was classified as Members’ Voluntary Winding Up, where the shareholders and directors managed the process. However, if the company was insolvent and unable to meet its liabilities, it fell under Creditors’ Voluntary Winding Up, requiring creditors’ approval, and a liquidator was appointed to ensure the fair distribution of assets among creditors. Additionally, the Act also provided for winding up under the supervision of the Court, wherein even if a company opted for voluntary winding up, the High Court could intervene and supervise the process if required. This provision was primarily used when allegations of misconduct, mismanagement, or creditor disputes arose.

Despite these provisions, the winding-up process under the Companies Act, 1956, was highly procedural and time-consuming, leading to substantial delays in resolving corporate insolvency matters. The reliance on High Courts, which were already burdened with numerous cases, created inefficiencies, prolonging the liquidation process. The lack of a specialized insolvency resolution framework further exacerbated these issues, making it difficult for creditors to recover dues efficiently and for companies to exit the market in a timely manner. Recognizing these challenges, the Companies Act, 2013, introduced significant reforms to streamline corporate insolvency and winding-up proceedings.

2. The Companies Act 2013

The Companies Act of 2013 introduced significant reforms to address the inefficiencies and delays in corporate insolvency resolution under the Companies Act 1956.13 One of the key changes was the establishment of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal to streamline company law matters, including disputes, mergers, and winding-up proceedings.14 The NCLT, a specialized quasi-judicial body, replaced the High Courts and the Company Law Board (CLB) as the primary 13 Roy, R.N., Srivastava, D.K. and Gupta, S., 2023. Navigating Financial Distress in India: Evaluating the Efficacy of the Insolvency and Bankruptcy Code, 2016 and Compromise Provisions under the Companies Act,

2013. J. Legal Ethical & Regul. Isses, 27, p.1.

14 Roy, R.N., Srivastava, D.K. and Gupta, S., 2023. Navigating Financial Distress in India: Evaluating the Efficacy of the Insolvency and Bankruptcy Code, 2016 and Compromise Provisions under the Companies Act,

2013. J. Legal Ethical & Regul. Isses, 27, p.1.

authority for handling insolvency cases, thereby significantly reducing legal delays. 15It was designed to provide a structured, efficient, and time-bound mechanism for corporate insolvency and liquidation proceedings. Furthermore, the NCLT plays a crucial role in the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016, ensuring faster and more transparent resolutions for financially distressed companies. 16 The National Company Law Appellate Tribunal (NCLAT) was established as an appellate authority for reviewing decisions made by the NCLT. 17 If any party such as creditors, shareholders, or company management is dissatisfied with an order passed by the NCLT, they can appeal to the NCLAT.

18 Further appeals against NCLAT’s rulings can be made to the Supreme Court of India, ensuring a structured legal hierarchy for corporate law adjudication. 19 The introduction of NCLT and NCLAT brought several advantages to the corporate insolvency framework. First, it allowed for specialized handling of corporate disputes and liquidation cases, reducing the backlog of cases that had previously overwhelmed the High Courts. Second, it significantly improved the speed and efficiency of insolvency resolution, making it easier for companies to either revive their operations or exit the market in a legally compliant manner. Third, it reduced the burden on the High Courts, as all windingup proceedings were transferred to the NCLT, freeing up judicial resources for other matters.

Lastly, it provided better creditor protection, ensuring that creditors could recover their dues in a structured and time-bound manner. Overall, these reforms marked a major shift in India’s corporate governance and insolvency resolution framework, moving towards a modern, structured, and efficient system. By reducing delays, enhancing transparency, and ensuring effective liquidation processes, the 15 Chen, T. W. , Azmi, R. and Abdul Rahman, R. , 2021. Theories of Corporate Insolvency: A Philosophical Analysis of the Corporate Rescue Mechanisms under the Companies Act 2016. UUM Journal of Legal Studies (UUMJLS), 12(02), pp. 167-202. 16 Sharma, S. and Kansal, A. K. , 2022. Insolvency and bankruptcy code, 2016 and resolution process: Retrospect and prospect. Vinimaya, 11, p. 23.

17 Singh, V.K., 2021. Modern corporate insolvency regime in India: A review. NLS Bus. L. Rev., p.22.

18 Singh, V.K., 2021. Modern corporate insolvency regime in India: A review. NLS Bus. L. Rev., p.22.

19 Chen, T.W., Azmi, R. and Abdul Rahman, R., 2021. Theories of Corporate Insolvency: A Philosophical Analysis of the Corporate Rescue Mechanisms under the Companies Act 2016. UUM Journal of Legal Studies (UUMJLS), 12(02), pp.167-202.

establishment of NCLT and NCLAT significantly improved the ease of doing business and strengthened financial stability within the corporate sector.

3. The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)

The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was enacted with the primary objective of identifying and rehabilitating financially distressed industrial companies in India. 20 The Act aimed to prevent the closure of potentially viable industrial units and protect the interests of stakeholders, including employees, creditors, and shareholders. 21To achieve this, the government established the Board for Industrial and Financial Reconstruction (BIFR) as the designated authority responsible for determining whether an industrial company was financially "sick" and required restructuring or liquidation. 22Once a company was declared sick under SICA, the BIFR had the power to suggest rehabilitation measures, such as financial restructuring, debt relief, or mergers with financially stable entities, to restore its viability.

If rehabilitation was not feasible, the BIFR could recommend winding up the company. However, despite its intended objectives, SICA failed to achieve efficient insolvency resolution and became widely misused. Many companies strategically sought protection under the Act, taking advantage of its provisions to evade their financial obligations and delay debt repayments. The process of identifying sick companies and implementing rehabilitation plans was highly bureaucratic and time-consuming, leading to indefinite delays in resolving insolvency cases. Instead of providing genuine relief to struggling companies, the Act ended up shielding defaulters, who exploited the legal framework to avoid creditor actions and stall liquidation proceedings for years.

Recognizing the widespread misuse and ineffectiveness of SICA, the government eventually repealed the Act, and its functions were absorbed under the Insolvency and Bankruptcy Code (IBC), 2016. 23 The IBC introduced a much more structured, transparent, 20 Sai, P. S. , 2024. Corporate Insolvency Resolution Process (CIRP): Insolvency and Bankruptcy Code. Issue 1 Int'l JL Mgmt. & Human. , 7, p. 990. 21 Jain, S. , 2015. Sick Industrial Companies (Special Provisions) Act, 1985: An Overview. Available at SSRN 2806950. 22 Singh, B. K. (2007). Industrial Sickness in India: Dimensions, Threats, and Remedies. The IUP Journal of Managerial Economics, 2, 63–88. https://ideas. repec. org/a/icf/icfjme/v05y2007i2p63-88. html 23 Jain, S. , 2015. Sick Industrial Companies (Special Provisions) Act, 1985: An Overview. Available at SSRN 2806950.

and time-bound insolvency resolution process, ensuring that nonperforming companies were either revived or liquidated in an efficient manner. Unlike SICA, which allowed companies to indefinitely delay resolution, the IBC imposes strict timelines for completing the Corporate Insolvency Resolution Process (CIRP), thereby preventing abuse of the system and ensuring faster resolution of financial distress.24

4. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) was introduced with the primary objective of facilitating the faster recovery of debts owed to banks and financial institutions by defaulting borrowers. 25 Before the enactment of this law, banks and financial institutions had to rely on regular civil courts to recover outstanding loans, which was a slow and inefficient process due to procedural complexities and a heavy backlog of cases. 26To address this issue, the Act established Debt Recovery Tribunals (DRTs) as specialized forums with the authority to handle loan default cases, thereby reducing the burden on civil courts and expediting the debt recovery process.

27 DRTs were empowered to adjudicate claims from banks and financial institutions for amounts exceeding ₹10 lakh, allowing lenders to take legal action against defaulting borrowers and recover outstanding dues through asset attachment and liquidation. 28 Although DRTs played an important role in improving debt recovery mechanisms, they were not designed to handle corporate insolvency and restructuring effectively. 29 Over time, as the number of non-performing assets (NPAs) and loan defaults increased, DRTs became overwhelmed with cases, leading to substantial delays in resolving financial disputes. The lack of adequate infrastructure, shortage of judicial officers, and procedural inefficiencies further slowed down the resolution process, making it difficult for banks to recover bad loans in a timely manner. Moreover, the absence of a comprehensive insolvency framework 24 Jain, S. , 2015.

Sick Industrial Companies (Special Provisions) Act, 1985: An Overview. Available at SSRN 2806950. 25 Dubey, G. S. , 2013. An Introduction to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993—A study. Chartered Accountant, 16. 26 TRIBUNAL, A. , 2021. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993. DRAT, Chennai. 27 Sai, P. S. , 2024. Corporate Insolvency Resolution Process (CIRP): Insolvency and Bankruptcy Code. Issue 1 Int'l JL Mgmt. & Human. , 7, p. 990. 28 Dubey, G. S. , 2013. An Introduction to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993—A study. Chartered Accountant, 16. 29 Dubey, G. S. , 2013. An Introduction to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993—A study. Chartered Accountant, 16.

meant that even if a borrower was unable to repay, there was no structured process to revive or liquidate the business efficiently.30 Recognizing these limitations, the Insolvency and Bankruptcy Code (IBC), 2016, was introduced to provide a more holistic and time-bound resolution framework for distressed companies and individuals. The IBC replaced the fragmented recovery mechanisms of DRTs and other debt recovery laws with a structured Corporate Insolvency Resolution Process (CIRP), ensuring a more effective approach to handling financial distress. While DRTs continue to function under the SARFAESI Act, 2002, for secured creditor enforcement, the IBC has become the primary legislation for insolvency and debt resolution, significantly improving the efficiency and transparency of the process.

5. The Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest Act (SARFAESI Act), 2002 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002, was enacted to empower banks and financial institutions with the authority to enforce security interests and recover dues from defaulting borrowers without the need for court intervention. Before the introduction of the SARFAESI Act, banks had to approach civil courts or Debt Recovery Tribunals (DRTs) under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) to recover outstanding loans, which led to significant delays due to the slow judicial process. 31 The SARFAESI Act aimed to overcome these challenges by providing secured creditors with direct enforcement powers, allowing them to seize and sell the assets of defaulting borrowers without prolonged litigation.

32 The SARFAESI Act empowers banks and financial institutions to take action against borrowers who default on loan payments, provided their account has been classified as a Non-Performing Asset (NPA) for more than 90 days. 33 Once an account is marked as an 30 Jain, S. , 2015. Recovery of debts due to banks and financial institutions: Legal framework in India. Available at SSRN 2808408. 31 Sai, P. S. , 2024. Corporate Insolvency Resolution Process (CIRP): Insolvency and Bankruptcy Code. Issue 1 Int'l JL Mgmt. & Human. , 7, p. 990.

32 Gautam, D., 2018. The SARFAESI Act: A Regulatory Framework for NPAs in India. Journal of Capital

Market and Securities Law, 1(1), pp.29-35.

33 Hasanmalek, N., 2023. The Securitization and Reconstruction of Financial Assets and Enforcement

of Security Interest Act (SARFAESI), 2002: A Critical Study. Russian Law Journal, 11(6), pp.99-109.

NPA, the lender issues a 60-day notice to the borrower, demanding repayment. 34 If the borrower does not comply within this period, the lender has the legal authority to seize the secured asset such as land, buildings, or machinery and either manage or sell it to recover the outstanding dues. 35 In cases where the borrower is a corporate entity, the lender can even take over the management or business operations to protect financial interests. To streamline the recovery process, banks can also appoint third parties, such as Asset Reconstruction Companies (ARCs), to handle and recover financial assets on their behalf. The Act played a crucial role in enabling the creation of ARCs, which purchase nonperforming loans from banks and financial institutions, working towards their recovery while helping banks clean up their balance sheets and maintain financial stability.

While the SARFAESI Act significantly strengthened creditor rights and improved the debt recovery process for secured creditors, it had several limitations. 36 The Act was largely focused on secured assets, meaning it only benefited lenders who had collateralbased loans. 37 Unsecured creditors had no direct remedy under SARFAESI and had to resort to civil courts or DRTs. 38 Additionally, the Act did not provide a structured insolvency resolution framework for distressed companies. 39 It only addressed the enforcement of security interests but did not offer a mechanism for restructuring or reviving financially distressed businesses.

Due to these shortcomings, the Insolvency and Bankruptcy Code (IBC), 2016, was introduced as a comprehensive insolvency resolution framework that provided a timebound process for handling both secured and unsecured creditors, enabling a structured approach to corporate insolvency and liquidation. While SARFAESI continues to be an important tool for secured creditor enforcement, the IBC has become the primary law for corporate 34 Hasanmalek, N. , 2023. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002: A Critical Study. Russian Law Journal, 11(6), pp. 99-109. 35 Saini, R. K. and Tayal, V. K. , 2018. Role of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 in NPAs Recovery. Anwesh, 3(2), p. 48.

36 Gautam, D., 2018. The SARFAESI Act: A Regulatory Framework for NPAs in India. Journal of Capital

Market and Securities Law, 1(1), pp.29-35. 37 Hasanmalek, N., 2023. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002: A Critical Study. Russian Law Journal, 11(6), pp.99-109. 38 Agrawal, K., 2016. Sarfaesi act, sica act, interplay between them and the overriding effect of sarfaesi over sica. 39 Hasanmalek, N., 2023. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002: A Critical Study. Russian Law Journal, 11(6), pp.99-109.

insolvency resolution, ensuring a more efficient and transparent debt recovery system.40

THE INTRODUCTION OF THE IBC, 2016

The Insolvency and Bankruptcy Code (IBC), 2016, was introduced as a landmark reform in India’s insolvency framework, aimed at providing a unified, structured, and time-bound mechanism for resolving financial distress and insolvency cases. 41 Before the IBC, multiple laws governed insolvency and debt recovery, such as the Companies Act, 1956 and 2013 , the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). 42 However, these laws were fragmented, inefficient, and lacked a coherent approach, often leading to prolonged legal battles and poor recovery rates for creditors.

43 To address these challenges, the IBC replaced the existing insolvency laws with a single, streamlined process that emphasized resolution over liquidation and introduced strict timelines to ensure swift proceedings. 44 Key Mechanisms of the IBC, 2016

1. Corporate Insolvency Resolution Process (CIRP)

The Corporate Insolvency Resolution Process (CIRP) is a key provision under the Insolvency and Bankruptcy Code (IBC) that provides a structured approach for resolving financial distress in companies.45 It allows financial creditors, operational creditors, or even the company itself to initiate insolvency proceedings when a business is unable to repay its debts. Rather than pushing companies straight into liquidation, the process is designed to explore ways to revive and restructure them. If a company defaults on a debt of ₹1 crore or more, creditors can approach the National Company Law Tribunal (NCLT) to file an

40 Gautam, D., 2018. The SARFAESI Act: A Regulatory Framework for NPAs in India. Journal of Capital

Market and Securities Law, 1(1), pp.29-35.

41 Singh, V.K., 2021. Modern corporate insolvency regime in India: A review. NLS Bus. L. Rev., p.22.

42 Katoch, R., 2017. Insolvency and Bankruptcy Code, 2016: Features, Mechanism and Challenges in

implementation. International Journal of Management, IT and Engineering, 7(9), pp.77-89. 43 Goel, S., 2017. The Insolvency and Bankruptcy Code, 2016: Problems & Challenges. Imperial Journal of Interdisciplinary Research (IJIR), 3, pp.2454-1362. 44 Goel, S., 2017. The Insolvency and Bankruptcy Code, 2016: Problems & Challenges. Imperial Journal of Interdisciplinary Research (IJIR), 3, pp.2454-1362. 45 Sai, P.S., 2024. Corporate Insolvency Resolution Process (CIRP): Insolvency and Bankruptcy Code. Issue 1 Int'l JL Mgmt. & Human., 7, p.990.

insolvency petition. Once admitted, the company enters a moratorium period, during which all legal proceedings and recovery actions are put on hold. The NCLT then appoints a Resolution Professional (RP), who takes over management from the board of directors and oversees the company's operations throughout the resolution process.46 A Committee of Creditors (CoC), comprising financial creditors, is formed to assess the company's viability and review resolution plans submitted by potential buyers or investors. The CoC must approve a resolution plan within 180 days, though this period can be extended up to 330 days in exceptional cases. If no feasible plan is agreed upon, the company moves toward liquidation. CIRP follows a strict timeline to ensure a swift resolution, focusing on giving financially viable businesses a fair chance to recover instead of forcing them into immediate closure.

2. Liquidation Process

If the Corporate Insolvency Resolution Process (CIRP) does not result in an approved resolution plan within the given timeline or if the Committee of Creditors (CoC) rejects all proposed plans, the company enters the liquidation stage. 47At this point, the focus shifts from trying to revive the company to systematically closing its operations and repaying its debts. The company’s assets are identified, valued, and sold, with the proceeds distributed according to a well-defined priority system known as the waterfall mechanism. 48 Secured creditors are paid first, followed by unsecured creditors, employees, and finally, shareholders. To ensure a fair and transparent process, a Liquidator is appointed to oversee the sale of assets and manage the distribution of funds.

The liquidation process under the Insolvency and Bankruptcy Code (IBC) is designed to prevent companies’ assets from being tied up in endless legal disputes, allowing creditors to recover their dues efficiently while ensuring an orderly wind-down of the business. 49

46 Wazalwar, P.M., 2021. National Company Law Tribunal and National Company Law Appellate Tribunal:

Law, Practice & Procedure. 47 Kumar, V., 2023. Reforms Brought in the Insolvency Regime: The Insolvency and Bankruptcy Code, 2016. Issue 2 Indian JL & Legal Rsch., 5, p.1. 48 Singh, A.P., Setia, R. and Sharma, N., 2022. Comparative Footing of Stakeholders under the IBC 2016: Summary Precis. Part 1 Indian J. Integrated Rsch. L., 2, p.1. 49 Agrawal, A., 2020. Liquidation As Going Concern Under Insolvency and Bankruptcy Law. Available at SSRN 3527389.

KEY

LEGAL

CHALLENGES

CORPORATE

BANKRUPTCY

AND

INSOLVENCY PROCEEDINGS

The Insolvency and Bankruptcy Code (IBC), 2016 was introduced to provide a structured, efficient, and time-bound mechanism for resolving insolvency and bankruptcy cases in India. While it has significantly improved insolvency resolution, several legal challenges continue to hinder its effectiveness. These challenges include judicial delays, stakeholder conflicts, excessive judicial intervention, ambiguities in the law, cross-border insolvency issues, and the tendency towards liquidation over resolution.50

1. Judicial Delays and Backlog of Cases

One of the primary objectives of the IBC was to ensure a time-bound resolution of insolvency cases, aiming to complete the Corporate Insolvency Resolution Process (CIRP) within 180 days (extendable to 330 days). 51 However, in practice, a majority of cases exceed these timelines, leading to prolonged uncertainty for creditors and stakeholders. 52A key reason for this delay is the overburdened National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT), which struggle with insufficient infrastructure, a shortage of judges, and an increasing volume of cases. Additionally, frequent appeals, stay orders, and litigations in higher courts further contribute to delays, as courts intervene in cases, disrupting the speed of the insolvency process.

53 The complexity of dealing with multiple creditors, regulatory authorities, and stakeholders also extends the resolution timeline, making insolvency proceedings much longer than initially envisioned under the IBC.

2. Conflicts Between Stakeholders

Corporate insolvency involves multiple stakeholders, including financial creditors, operational creditors, promoters, investors, employees, and resolution applicants, each with 50 Goel, S., 2017. The Insolvency and Bankruptcy Code, 2016: Problems & Challenges. Imperial Journal of Interdisciplinary Research (IJIR), 3, pp.2454-1362. 51 Zahra, A., 2022. Delay of Corporate Justice: Need of an Hour to Review Indian Judicial System. Part 1 Indian J. Integrated Rsch. L., 2, p.1.

52 Zahra, A., 2022. Delay of Corporate Justice: Need of an Hour to Review Indian Judicial System. Part 1 Indian J. Integrated Rsch. L., 2, p.1.

53 Ravichandra Rao, N. and Kasture, J., 2024. Sectoral insights into corporate insolvency: a comprehensive analysis of Corporate Insolvency Resolution Process (CIRP) outcomes in India. International Journal of Law and Management.

conflicting interests.54These conflicts frequently lead to disputes, litigations, and delays in decision-making.55 One of the most debated issues is the differential treatment of financial and operational creditors.56 Initially, the IBC gave financial creditors priority in decisionmaking through the Committee of Creditors (CoC), while operational creditors had limited say. This led to legal challenges, notably in Swiss Ribbons Pvt. Ltd. v. Union of India (2019), where the Supreme Court upheld the distinction but emphasized fairness in distribution. Additionally, promoters often attempt to regain control over their distressed firms through legal loopholes, complicating the resolution process. Another major issue arises within the CoC itself, where creditors with differing interests struggle to reach a consensus on resolution plans, further delaying proceedings.

3. Excessive Judicial Intervention

While judicial oversight is essential to ensuring fairness in insolvency proceedings, excessive interference by the Supreme Court, High Courts, and NCLT and NCLAT has undermined the speed and efficiency of the IBC process. 57 Courts frequently hear appeals and grant stay orders, which contradict the IBC’s objective of minimizing judicial intervention. A landmark case highlighting this issue is Essar Steel India Ltd. v. Satish Kumar Gupta (2019), where the Supreme Court ruled that while the Committee of Creditors (CoC) had the final say on approving resolution plans, the NCLT still had the power to ensure equitable distribution of proceeds among all creditors. 58 Similarly, in ArcelorMittal India Pvt. Ltd. v.

Satish Kumar Gupta (2018), the Supreme Court addressed the issue of ineligibility under Section 29A of the IBC, ruling that promoters of defaulting companies could not bid for their own assets. While these rulings have helped clarify aspects of the 54 Agarwal, A. K. , Das, A. , Jacob, J. and Mohapatra, S. , 2020. Introduction to the Special Issue on ‘Financial Distress, Bankruptcy, and Corporate Finance’. Vikalpa, 45(2), pp. 61-68. 55 Agarwal, A. K. , Das, A. , Jacob, J. and Mohapatra, S. , 2020. Introduction to the Special Issue on ‘Financial Distress, Bankruptcy, and Corporate Finance’. Vikalpa, 45(2), pp. 61-68. 56 Thakkar, H. , Agarwal, P. and Johnson, R. K. , 2024. Behavior Of Creditors And Involved Stakeholders In The Corporate Insolvency Resolution Process (CIRP) In India: An Economic Perspective. Hiteshkumar Thakkar, Agarwal, P. & Johnson, RK (2024).

“Behaviour of Creditors and Involved Stakeholders in Corporate Insolvency Resolution Process (CIRP): An Economic Perspective”. Law and Economics Yearly Review, Forthcoming Volume & Issue [ISSN: 2050‐9014]. 57 Chawda, A. , 2024. A Comprehensive Analysis of India's Insolvency and Bankruptcy Laws. Issue 2 Int'l JL Mgmt. & Human. , 7, p. 3551. 58 Saxena, A. and Kothiyal, A. , 2020. Supreme Court of India's Judgment in Essar Steel Case: A Shot in the Arm for India's Insolvency Law. Insolvency & Restructuring Int'l, 14, p. 16.

IBC, frequent judicial interventions often cause delays, create legal uncertainties, and increase the risk of inconsistent interpretations.

4. Ambiguities in the IBC Framework

Despite several amendments to the IBC, legal ambiguities persist, leading to inconsistent interpretations by courts and tribunals. One major area of uncertainty is the applicability of the Limitation Act, 1963, which determines time limits for filing insolvency applications. 59 While the Supreme Court clarified in B. K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates (2018) that the Limitation Act applies to IBC cases, different courts have interpreted its provisions inconsistently. 60 Another area of ambiguity is the treatment of personal guarantors of corporate debtors. In several cases, courts have ruled that personal guarantors can be held liable even after a corporate resolution plan is approved, creating uncertainty for promoters who have provided personal guarantees.

Additionally, the classification of homebuyers as financial creditors (as seen in the Jaypee Infratech case) led to legal disputes regarding their rights and voting power in insolvency proceedings. These ambiguities cause frequent litigation, delay insolvency cases, and reduce confidence in the IBC framework.

5. Cross-Border Insolvency Challenges

India currently lacks a comprehensive legal framework to handle cross-border insolvency cases, which is a major concern for multinational corporations and foreign investors. Insolvency cases involving foreign creditors, assets located in multiple jurisdictions, or multinational companies operating in India face significant legal challenges due to jurisdictional conflicts and enforcement issues.61 While the Indian government has proposed adopting the UNCITRAL Model Law on Cross-Border Insolvency, its implementation is still pending.62 The absence of clear guidelines makes it difficult to recover assets situated abroad, delays resolution processes, and discourages foreign

59 Chaudhry, K., 2024. Uncoding The Code: A guide to the Indian Insolvency & Bankruptcy Code 2016.

OrangeBooks Publication. 60 Sarkar, O., 2021. The Law of Limitation Vis-À-Vis the Insolvency and Bankruptcy Code, 2016: An Analysis. Available at SSRN 3945249. 61 Das, I., 2020. The Need for Implementing a Cross-Border Insolvency Regime within the Insolvency and Bankruptcy Code, 2016. Vikalpa, 45(2), pp.104-114. 62 McCormack, G. and Wai Yee, W., 2018. The UNCITRAL model law on cross-border insolvency comes of age: new times or new paradigms. Tex. Int'l LJ, 54, p.273.

investments in Indian companies. Several high-profile insolvency cases, such as Jet Airways (2019), have highlighted the need for a well-defined crossborder insolvency mechanism to ensure seamless coordination between Indian and foreign courts.

6. Insolvency Resolution vs. Liquidation Bias

While the IBC was designed to prioritize resolution over liquidation, in practice, a significant percentage of cases end in liquidation rather than revival. According to reports, over 50% of insolvency cases result in liquidation, rather than successful resolution. The reasons for this include a lack of viable resolution plans, poor asset valuation, and distressed sale prices, which discourage investors from acquiring stressed assets. Additionally, promoters and existing management often resist the insolvency process, making it difficult to achieve a successful resolution. For instance, companies under insolvency proceedings may fail to attract buyers due to outdated business models, operational inefficiencies, and unresolved legal liabilities.

The liquidation bias reduces the effectiveness of the IBC in reviving distressed businesses, resulting in job losses, reduced economic activity, and lower recovery rates for creditors.