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Insolvency and Bankruptcy Laws in India: Evolution and Challenges

Insolvency and Bankruptcy Laws in India_ Evolution and Challenges

Insolvency and Bankruptcy Laws in India

The law of insolvency and bankruptcy is critical to the functioning of any economy. These laws aid in the restructuring of a company’s various assets as well as the dissolution of these assets. The law’s primary goal is to reorganise and remedy the insolvency of corporate persons.

The Insolvency and Bankruptcy Code, 2016, is comprehensive legislation that incorporates both the subsequent elements of a debtor’s economic collapse – rehabilitation and liquidation – within its multiplicity.

The primary goal of the legislation is to restructure and resolve the insolvency of corporate people, partnership companies, and individuals as soon as possible in order to leverage the maximum value of such persons’ assets. While doing so, it is also important to boost entrepreneurship and credit availability.

What precisely do we understand by insolvency?

Insolvency refers to a situation in which a corporation is unable to obtain sufficient cash to pay off its obligations and payments in a timely manner.

Bankruptcy occurs when the court identifies and recognises insolvency while ignoring instructions for its resolution. When the court is confident that the business is insolvent, it issues an order dividing the proceeds among the creditors for the payment of the company’s debts.

One of the main barriers to bankruptcy is that the average time taken to resolve bankruptcy cases in India is 4.3 years, which is significantly longer than the time taken in nations such as the United States and the United Kingdom.

Insolvency and Bankruptcy Code, 2016

The IBC was proposed by the Bankruptcy Legislative Reforms Committee, led by TK Viswanathan. The IBC’s goal was to consolidate and reform laws governing the reorganisation and economic resolution of businesses and persons in a timely way in order to maximise the value of assets.

In the year 2016, the insolvency legislation was passed and announced in the official gazette of India with the goal of resolving insolvency matters in a timely manner, which is done by insolvency experts. Its major goal was to correct the faults made by previous legislation by separating commercial and judicial issues

The adjudicating bodies, according to the IBC, are the NCLT. Given that the IBC is the umbrella legislation that encompasses other insolvency laws, it has diminished the need for prior legislation by addressing insolvency, bankruptcy, and sick company reorganisation.

The Insolvency and Bankruptcy Code was enacted in 2016 as a major legislative change in the Indian economy. It was enacted because India lacked legislation that aided in the resolution of distressed assets and debt-laden companies. As a result, the court consolidated all insolvency rules into a single legislation, the IBC 2016.

This legislation intended to increase the flexibility of India’s insolvency rules. One aspect of this code is that it allows creditors to evaluate the feasibility of a business, decide the inspiration of the firm, and then request the liquidation or winding down of the business. The code’s goal was to create a new institutional framework that included a regulator, financial condition experts, data utilities, and assessment mechanisms to improve the formal financial condition resolution procedure and liquidation.

Institutional Framework of Insolvency and Bankruptcy Code, 2016

The Institutional Framework of IBC, 2016, has 4 pillars.

The Institutional Framework of IBC, 2016, has 4 pillars

  • Insolvency and Bankruptcy Board of Republic of India
  • National Company Law Appellate Tribunal
  • Insolvency Professional
  • Information Utilities

The board’s deployment and functioning are overseen by the Insolvency and Bankruptcy Board of the Republic of India. The IBC creates it as a restricted yet superior body. This board is in charge of IBC concerns and controls not just the profession but also the processes. The board is critical in implementing the code that modifies the regulations governing the conversion of bankrupt enterprises.

The NCLT, which is the adjudicating authority, hears cases involving this code under insolvency law. This authority serves as a venue for the settlement of insolvency proceedings. An appeal under the NCLT can be dismissed, or a stay of execution can be requested against the order. NCLAT is the site where NCLT appeals may be filed. The ruling of the NCLAT can be appealed to the Supreme Court, which is the highest court of authority.

The IBC establishes a body of experts known as insolvency professionals, who are responsible for overseeing different parts of bankruptcy resolution. To govern the activity of the Insolvency Professionals, an extra corporate organisation called the Insolvency Professional Agencies is formed. Individual practitioners must be enrolled with the IPAs’ sceptre in order to control and enhance the function of insolvency professionals.

The information utilities under the IBC, 2016, make it feasible to acquire and transfer information from creditors to corporations. Currently, creditors’ financial information may only be acquired through the income tax department.

The purpose of the information utilities under the IBC, 2016, is to bridge the gap in obtaining and transmitting information from creditors to corporations. Only the Republic of India’s Insolvency and Bankruptcy Board has the ability to license Information Utilities, as well as the capacity to regulate them and give access to information.

Evolution of IBC Law Over the years…….

There have been several modifications to the code since the IBC 2016 was enacted. The code has been modified five times in five years, and several important cases, such as the Insolvency and Bankruptcy Code (Second Amendment) Act 2020, have deciphered it.

The code’s regulations have been modified from time to time. The Indian courts have witnessed historic cases deciphering this code, raising the question of its legality in light of its murky regions. The implementation of the IBC has been difficult due to several revisions made to the IBC’s regulatory structure. The changes were done to make the code more user-friendly.


The IBC provides a time-bound resolution mechanism with the goal of increasing the value of a troubled firm. This will help not just the creditor and debtor firms, but also the economy as a whole because money and productive resources will be redeployed rather rapidly.

  1. To hear the cases, a strong and effective adjudicating authority is required.
  2. Insolvency professionals (IPs) are regulated specialists that manage insolvency and bankruptcy proceedings.
  3. A regulated competitive information utilities (IUs) sector to eliminate information asymmetries in the insolvency resolution process.
  4. A regulator – the Insolvency and Bankruptcy Board of India (IBBI) – to exercise legislative, executive, and quasi-judicial duties with regard to IPs and IUs, as well as create laws for IBC resolution procedures.

The establishment of this institutional framework is now in the works. The National Company Law Tribunal (NCLT) has been designated as the adjudicating body in corporate insolvency and bankruptcy proceedings. The IBBI has been established and is working to increase capacity.

Challenges in implementation

The NCLT will encounter the most difficult challenges in transferring current cases to the IBC. The NCLT now comprises 11 benches, each with 16 judicial and seven technical members. Its scope includes considering matters formerly handled by the Company Law Board (CLB) under the Companies Act 2013, as well as cases handled under the IBC. 

First Challenge

  • There were around 4,200 pending CLB cases as of March 2015. These will all be moved to the NCLT. Furthermore, the CLB gets around 4,000 new cases each year. The NCLT will now have to deal with these.
  • With IBC rules on CIRP already in effect and the regulations on dissolution due to be notified soon, all 4,500 curving cases pending in the high courts as of March 2015 are likely to be moved to the NCLT. 
  • According to our findings, corporate recovery cases at debt recovery tribunals (DRTs) and rehabilitation cases at the Board for Industrial and Financial Reconstruction (BIFR) are both eligible to be launched as new IBC cases.
  • With this low permeability capacity, how will the NCLT deal with new IBC cases, as well as matters from the CLB, high courts, the BIFR, and perhaps the DRT? The NCLT will fail to hear and dispose of matters in a timely way from the outset unless its adjudication capacity is increased. 
  • For the IBC cases, this might imply that the NCLT will be unable to comply with the CIRP’s 180-day deadline.

The second challenge

  • Concerns about the NCLT revolve around the case law that emerges under the IBC. Given that it is new legislation, the processes and common practices governing it must evolve independently of the case rules governing the pre-IBC system. 
  • Because the first cases to come before the IBC are likely to be existing ones, the initial case law that emerges under the IBC will reflect the circumstances of previous cases.
  • Creditors, debtors, auditors, lawyers, valuers, and liquidators all act in accordance with the old case laws enshrined in the Companies Act 1956, the Sick Industrial Companies Act 1985 (SICA), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and similar legislation.
  • This will change only when the IBC is finalised as legislation and its institutional architecture achieves its potential, allowing the NCLT to focus on enforcing the IBC’s overarching priors. To do this, the IPs, IUs, NCLT, and IBBI must all be correctly established and functioning in accordance with the IBC.
  • To guarantee that IPs fulfil their duties honestly, well-defined entrance barriers to the profession must be created, and IPs must be strictly controlled by the IBBI. 
  • To get registered as IPs, a qualifying examination has been recommended. This is modelled after the best practices of other nations with a well-functioning IP industry, such as Canada and the United Kingdom.

Third Challenge

  • The absence of IU infrastructure. A CIRP can only be triggered under the IBC if the debtor firm has gone into default. 
  • The IU in the IBC architecture allows for faster case start by providing access to incontrovertible and visible proof of the default. Currently, winding up petitions under the Companies Act of 1956 and SICA proceedings take one to two years to be heard.
  • The position is slightly better at the DRTs, at which Bankers Books Evidence Act permits bank books to be used as primary evidence in court. Even so, there are delays in proving the scope of debt and default.
  • In the absence of IUs, the IBBI must define the default evidence that can be used to initiate an IBC case. This can result in lengthy delays, especially if the NCLT is engaged in determining whether a default has occurred. 
  • As a result, in the absence of IUs, commencing a lawsuit and creating the creditors’ committee is likely to take considerably longer than anticipated in the IBC design. This will make meeting the 180-day deadline for completing the CIRP problematic, giving rise to two probable outcomes:
  1. the delays in creating the creditors’ committee will shorten the time available to reach an agreement on a resolution plan. If the committee is unable to reach an agreement on a resolution plan within the time frame given, the NCLT will order the company’s liquidation.
  2. the NCLT may use its judicial discretion to prolong the CIRP beyond the time limit set by statute. Both of these results are undesirable. The former induces a liquidation bias in CIRP, whereas the latter jeopardises the IBC’s core architecture of time-bound resolution.

The current implementation of the IBC appears to be more concerned with rapidly operationalizing the law than with properly executing it. If these concerns are not handled appropriately, the goal of implementing new insolvency legislation to enhance the recovery rate in order to encourage the growth of credit markets and entrepreneurship would be defeated.

Will it become a successful approach?

  • The IBC is a significant reform for India, and its successful implementation is contingent on careful transition planning. The existing corporate insolvency cases are expected to be the first to be heard by the IBC. 
  • Four measures are required to guarantee that they do not have a negative influence on the design and effectiveness of the IBC.
  • The NCLT’s capabilities must be built with careful project planning.
  • This might imply establishing a separate bench dedicated just to IBC cases, scaled to the projected IBC caseload, and educated in dealing with commercial concerns, including the intricacies of current cases.

The NCLT must guarantee that the IBC requirements be enforced without exception in each matter that comes before it, regardless of its priors. If the NCLT is structured like a traditional Indian tribunal, it will quickly create a multi-year backlog.


The Insolvency and Bankruptcy Code was the driving force behind the creation of insolvency and bankruptcy law in India. There are certain complications associated with this legislation; thus, you should review modifications and court declarations to better understand the law.

Adequate institutional capacity is required to guarantee that the IBC does not meet the same fate as previous reform initiatives such as the DRTs. Doing all of these things takes time and careful planning.

Rush thru the introduction of the proposed legislation may enhance India’s position in the World Bank’s “Doing Business” report, but it may not result in a de facto improvement of the bankruptcy resolution system, undermining the IBC’s fundamental objective.

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