The Insolvency and Bankruptcy Code, 2016 (IBC) is one of the most important economic reforms in Indian legal and financial history. Before the IBC was enacted, India faced severe challenges in debt recovery and insolvency resolution due to a fragmented legal framework and prolonged litigation. The IBC emerged as a game-changing solution to address the growing burden of Non-Performing Assets (NPAs) and to create a time-bound and creditor-friendly system for resolving financial distress. Its purpose is not only to maximize asset value and recoveries but also to improve the ease of doing business and restore lender confidence in the economy.

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What is Insolvency and Bankruptcy?

IBC brings both insolvency and bankruptcy processes under a unified legal umbrella and applies to corporations, individuals, and partnerships.

Insolvency

Insolvency refers to the situation where an individual or entity is unable to repay debts when they become due. It is a financial state that may lead to legal proceedings.

Bankruptcy

Bankruptcy is the legal status of a person or entity declared incapable of meeting debt obligations. It is the formal process initiated after insolvency is declared, which involves distributing the debtor's assets among creditors.

History and Evolution of the Insolvency and Bankruptcy Code

Prior to IBC, India had multiple scattered laws dealing with insolvency, such as:

• The Sick Industrial Companies Act (SICA), 1985

• The Recovery of Debt Due to Banks and Financial Institutions Act (RDDBFI), 1993

• SARFAESI Act, 2002

• Companies Act, 2013

These laws led to lengthy litigations, inconsistent verdicts, and poor recovery rates. The average time for insolvency resolution was over 4 years and recovery rates were below 25%.

Recognizing the need for an efficient and unified law, the Bankruptcy Law Reforms Committee (BLRC), chaired by Dr. T.K. Viswanathan, recommended the creation of a single code. This led to the passage of IBC in May 2016 and its enforcement in December 2016.

Legal Framework of Insolvency and Bankruptcy Code

The IBC is structured into distinct parts and sections, laying down a unified and time-bound legal mechanism for resolving insolvency across individuals, companies and partnership firms. The IBC is a comprehensive and evolving legislation, consisting of

• 266 Sections (as amended)

• 5 Parts

• 7 Schedules

Structure of the Code:

1. Part I – Preliminary

2. Part II – Insolvency Resolution and Liquidation for Corporate Persons (Companies and LLPs)

3. Part III – Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms

4. Part IV – Regulation of Insolvency Professionals, Agencies, and the Insolvency and Bankruptcy Board of India (IBBI)

5. Part V – Miscellaneous Provisions

Key Provisions of the IBC

The Code contains several core provisions that govern how insolvency processes are initiated, managed, resolved, or liquidated in a systematic and transparent manner.

1. Corporate Insolvency Resolution Process (CIRP)

The Corporate Insolvency Resolution Process (CIRP) is a legal procedure under the IBC for resolving the financial distress of a company by restructuring or selling it within a time-bound framework.

• Initiated when a company defaults on debt of ₹1 crore or more (threshold may vary).

• Time-bound process: 180 days (extendable up to 330 days).

• Managed by an Insolvency Resolution Professional (IRP).

• Formation of Committee of Creditors (CoC), who vote on resolution plans.

2. Insolvency Resolution for Individuals and Firms

• Notified for partnership and personal guarantors to corporate debtors.

• Involves a fresh start, debt restructuring, or bankruptcy adjudication.

3. Moratorium

• An automatic moratorium is imposed once CIRP begins, prohibiting legal proceedings and asset transfers.

4. Liquidation

• If no resolution plan is approved, the company enters liquidation.

• Assets are sold and proceeds are distributed as per the waterfall mechanism.

5. Fast-Track Insolvency

• For small companies, startups, and unlisted companies with assets under a prescribed limit.

• Timeline: 90 to 180 days.

6. Cross-Border Insolvency (under development)

• India is considering adoption of the UNCITRAL Model Law to handle cases involving foreign assets or creditors.

Recent Amendments and Developments

IBC has undergone multiple amendments to address emerging challenges, improve resolution outcomes and introduce tailored mechanisms such as pre-pack insolvency for MSMEs.

1. IBC (Amendment) Act, 2021

• Introduced pre-packaged insolvency resolution for MSMEs.

• Simplified resolution with reduced cost and minimal disruption to business.

2. Insolvency and Bankruptcy (Amendment) Bill, 2022 (Proposed)

• Aims to enhance transparency and accountability.

• Focuses on faster disposal of frivolous applications.

3. IBC (Amendment) Act, 2019

• Tightened the eligibility criteria for resolution applicants.

• Provided clarity on treatment of financial and operational creditors.

4. Suspension During COVID-19

• Sections 7, 9, and 10 were temporarily suspended (March 2020 - March 2021) to prevent insolvency proceedings due to pandemic-related disruptions.

Landmark Judgments

Judicial interpretations by the Supreme Court and NCLT have significantly shaped the practical implementation of IBC and clarified various contentious legal provisions.

1. Swiss Ribbons v. Union of India (2019)

• Upheld the constitutional validity of IBC.

• Emphasized the importance of economic legislation for public interest.

2. Essar Steel Case (2019)

• Supreme Court upheld the primacy of the Committee of Creditors.

• Affirmed the role of financial creditors over operational ones in plan approval.

3. Innoventive Industries v. ICICI Bank (2017)

• First major IBC case.

• Reinforced the principle of default-based trigger for insolvency proceedings.

4. ArcelorMittal India Pvt Ltd v. Satish Kumar Gupta (2018)

• Addressed the issue of promoter ineligibility under Section 29A.

• Promoters with prior NPAs were barred from bidding for their own companies.

Impact of Insolvency and Bankruptcy Code

The Code has had a transformative effect on India’s insolvency ecosystem, enhancing recovery rates, disciplining borrowers and improving ease of doing business.

Positive Outcomes:

• Improved Ease of Doing Business: India's rank jumped from 130 to 63 (World Bank, 2020).

• Higher Recoveries: Average recovery rose from 26% (pre-IBC) to 43% under IBC.

• Speedier Resolutions: Several big defaulters like Bhushan Steel, Essar Steel were resolved within IBC timelines.

Challenges:

• Delays in NCLT: Burdened tribunal system leads to extended timelines.

• Low Resolution Rates: Many cases still end in liquidation.

• Need for Capacity Building: More Insolvency Professionals (IPs) and infrastructure are required.

Institutional Framework

IBC is supported by a robust institutional ecosystem involving regulators, adjudicating bodies, and professionals who ensure smooth and efficient resolution of insolvency cases.

1. Insolvency and Bankruptcy Board of India (IBBI) – Regulator for insolvency proceedings and professionals.

2. National Company Law Tribunal (NCLT) – Adjudicates corporate insolvency cases.

3. Debt Recovery Tribunal (DRT) – Handles individual insolvency and partnerships.

4. Insolvency Professionals (IPs) – Manage the insolvency resolution or liquidation process.

5. Information Utilities (IUs) – Maintain financial information and help verify claims.

Summary

The Insolvency and Bankruptcy Code, 2016, has been a bold and visionary step toward financial discipline, creditor empowerment and economic efficiency. It has brought transparency, accountability and speed to India’s insolvency resolution process. While implementation challenges persist, ongoing amendments and judicial scrutiny are helping to refine the framework. With further reforms, IBC is poised to evolve into a globally competitive and efficient insolvency law that fuels economic growth and investor confidence.

Related Posts:

• Difference Between Insolvency and Bankruptcy

• Integrated Law Course 

• Master in Law Abroad

• Is Lawyering a Good Career in India?

• Section 43 of IBC

• Section 60 of IBC

Insolvency and Bankruptcy Code: FAQs

Q1. What is the difference between insolvency and bankruptcy?

Insolvency is the financial condition of not being able to pay debts, while bankruptcy is the legal declaration and process that follows insolvency.

Q2. Are homebuyers considered financial creditors under IBC?

Yes, following amendments in 2018, homebuyers are recognized as financial creditors and can initiate insolvency proceedings against defaulting developers.

Q3. What happens if no resolution plan is approved?

If no resolution plan is approved within the prescribed period, the company goes into liquidation, and assets are sold to repay creditors.

Q4. What is a pre-packaged insolvency process?

It is a simplified, fast-track insolvency resolution mechanism introduced for MSMEs in 2021, allowing resolution through prior negotiation with creditors.

Q5. Which authority adjudicates insolvency cases under IBC?

The National Company Law Tribunal (NCLT) adjudicates corporate insolvency cases, while the Debt Recovery Tribunal (DRT) handles individual insolvency.