Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC), 2016 created a single framework for dealing with insolvency and bankruptcy in India. Its basic idea is simple: when a person or company is unable to repay its debts, the problem should be resolved quickly, systematically and fairly, instead of allowing the debt to remain stuck for years.

The IBC focuses mainly on reviving viable businesses, improving recovery for creditors and strengthening repayment discipline.

Key Objectives of IBC

• Time-bound resolution: Resolve insolvency cases within a defined framework.
• Better recovery: Improve the recovery prospects of banks and other creditors.
• Credit discipline: Discourage borrowers from delaying or avoiding repayment.
• Business revival: Give viable businesses an opportunity to continue rather than immediately liquidating them.
• Unified framework: Bring insolvency-related proceedings under a common legal framework.

Who Comes Under IBC?

IBC covers:

• Companies
• Limited Liability Partnerships (LLPs)
• Partnership firms
• Individuals
• Personal guarantors to corporate debtors

Adjudicating Authorities

• NCLT: Deals with insolvency proceedings involving companies and LLPs.
• DRT: Deals with insolvency matters relating to individuals and partnership firms.

Corporate Insolvency Resolution Process (CIRP)

CIRP is the main process used to resolve insolvency in the case of a corporate debtor.

How Does CIRP Work?

Initiation of Proceedings: The process can be initiated by a financial creditor, operational creditor or the corporate debtor, subject to the conditions laid down under the IBC.

Application to NCLT: The application is filed before the National Company Law Tribunal (NCLT).

Admission of the Case: Once the NCLT admits the application, the CIRP formally begins.

Appointment of Resolution Professional: An Insolvency Professional (IP) manages the resolution process.

Management Changes: The powers of the company’s board are suspended and the management comes under the resolution process.

Committee of Creditors: The Committee of Creditors (CoC), primarily consisting of financial creditors, takes important decisions on the resolution plan.

Resolution or Liquidation: If a suitable resolution plan is approved, the business is revived. If resolution fails, the company may proceed towards liquidation.

Institutional Framework under IBC

Insolvency Professionals (IPs)

Insolvency Professionals manage insolvency proceedings and perform functions assigned to them under the IBC. They operate through Insolvency Professional Agencies (IPAs).

Information Utilities (IUs)

Information Utilities maintain and provide financial information relating to debt and defaults. This helps creditors and other stakeholders establish their claims.

Insolvency and Bankruptcy Board of India (IBBI)

IBBI is the principal regulator under the IBC framework. It oversees:

• Insolvency Professional Agencies
• Insolvency Professionals
• Information Utilities

Committee of Creditors (CoC)

The CoC mainly consists of financial creditors. It plays a central role in evaluating and approving resolution plans and overseeing the resolution process.

Financial Creditor vs Operational Creditor

Pre-Packaged Insolvency Resolution Process (PIRP)

The Pre-Packaged Insolvency Resolution Process (PIRP) was introduced in 2021, particularly to provide a simpler and faster resolution mechanism for MSMEs.

Key Features of PIRP

• Debtor-in-possession: Existing management generally continues to run the business.
• Creditor oversight: Creditors retain an important role in the resolution process.
• Base resolution plan: The debtor submits a base resolution plan.
• Faster process: It aims to resolve financial stress with less disruption to business operations.
• MSME focus: It was introduced to help smaller businesses deal with financial distress more efficiently.

Why is IBC Important?

Improves Credit Discipline

IBC has created a stronger incentive for borrowers to repay their debts because prolonged default can result in loss of control over the business.

Improves Recovery

It provides banks and other creditors with a structured mechanism to recover dues from stressed borrowers.

Focuses on Resolution

The framework gives preference to reviving viable businesses rather than simply selling their assets.

Strengthens Corporate Governance

The possibility of insolvency proceedings encourages promoters and management to maintain greater financial discipline.

Provides an Exit Mechanism

IBC creates a more organised process for dealing with businesses that are no longer viable, helping reduce the problem of permanently locked-up capital.

Major Challenges of IBC

Delays in Resolution

Although the framework is designed to be time-bound, cases can take longer because of litigation, procedural issues and judicial delays.

Limited Institutional Capacity

Capacity constraints in NCLT and NCLAT can slow down insolvency proceedings.

Excessive Litigation

Legal challenges by different stakeholders can delay the implementation of approved resolution plans.

Valuation Difficulties

Valuing stressed assets can be complicated, particularly when a business has significant intangible or specialised assets.

Challenges for Start-ups and Technology Firms

Businesses built around intellectual property, technology, data and licences may not fit easily into traditional insolvency processes.

Way Forward

Strengthen NCLT and NCLAT: Increase capacity, improve digital systems and streamline case management.

Ensure Legal Certainty: Approved resolution plans should receive greater finality to reduce prolonged litigation.

Expand Pre-Pack Resolution: Make greater use of pre-packaged mechanisms for suitable MSMEs and other eligible businesses.

Develop Sector-Specific Solutions: Create appropriate mechanisms for businesses involving complex assets such as intellectual property, technology and licences.

Strengthen the Insolvency Ecosystem: Improve the capacity and quality of insolvency professionals, information utilities and valuation experts.

Conclusion

The IBC has changed India’s approach to insolvency by moving the focus from prolonged debt recovery to time-bound resolution, creditor participation and business revival. However, its success ultimately depends on faster judicial processes, stronger institutional capacity and greater certainty in the implementation of resolution plans.

FAQs 

What is IBC?

IBC is India’s unified framework for resolving insolvency and bankruptcy.

When was IBC enacted?

The Insolvency and Bankruptcy Code was enacted in 2016.

What is CIRP?

Corporate Insolvency Resolution Process (CIRP) is the process used to resolve insolvency involving corporate debtors.

Who regulates insolvency under IBC?

The Insolvency and Bankruptcy Board of India (IBBI) is the principal regulator under the IBC framework.

What is the role of NCLT?

The NCLT is the adjudicating authority for insolvency proceedings involving companies and LLPs.

Who is a financial creditor?

A financial creditor has a claim arising from a financial debt, such as a loan or certain debt instruments.

Who is an operational creditor?

An operational creditor has dues arising from the supply of goods, services or employment.

What is PIRP?

PIRP is a pre-packaged insolvency mechanism introduced mainly for MSMEs, allowing existing management to continue running the business while creditors exercise oversight.

What is the main objective of IBC?

The main objective is to ensure timely insolvency resolution, better recovery for creditors and revival of viable businesses.