The Insolvency and Bankruptcy Code 2016 was introduced as a comprehensive reform to address the growing issues of insolvency and bankruptcy in India. Before the implementation of this code, there were multiple overlapping laws governing insolvency matters, leading to confusion, delays, and inefficiency. Creditors often faced long legal battles to recover dues, while debtors had no streamlined system for resolving their financial distress. The introduction of this code brought clarity, speed, and uniformity to insolvency proceedings for individuals, companies, and partnership firms.
The code is not only about resolving insolvency; it is also about promoting responsible business practices, maintaining investor confidence, and ensuring that financially troubled entities are either revived or closed in a time-bound manner. It has been recognized as a landmark legislation in India’s economic and legal landscape.
The Need for a Unified Insolvency Framework
Prior to the enactment of this code, insolvency cases were handled under various laws such as the Companies Act, the Sick Industrial Companies Act, and the Recovery of Debts Due to Banks and Financial Institutions Act. This fragmented framework meant that different authorities handled different cases, often with conflicting procedures and timelines.
This created significant challenges:
- Cases would often drag on for years, eroding asset value.
- Creditors had limited chances of recovery due to procedural delays.
- Debtors lacked a clear and fair opportunity for revival.
The Insolvency and Bankruptcy Code addressed these issues by providing a single, consolidated framework that applied uniformly across individuals, partnership firms, and companies. This integration has greatly improved efficiency and transparency in the system.
Key Objectives of the Code
The primary goals of the Insolvency and Bankruptcy Code 2016 include:
- Providing a structured and time-bound process for resolving insolvency.
- Maximizing the value of assets during resolution.
- Balancing the interests of all stakeholders, including creditors and debtors.
- Encouraging entrepreneurship by allowing a fair exit mechanism for failed businesses.
- Improving the ease of doing business and boosting investor confidence in the Indian economy.
These objectives are achieved through a mix of legal provisions, strict deadlines, and the involvement of licensed professionals to ensure impartial decision-making.
Resolution of Insolvency
One of the most notable features of the code is the strict timeline for completing insolvency resolution. The process can be initiated by either a debtor or a creditor, and the resolution framework is slightly different for companies compared to smaller entities like start-ups or small businesses.
For companies, the resolution process must be completed within 180 days from the commencement date. If necessary, this period can be extended by an additional 90 days, but only if a significant majority of creditors approve the extension.
For start-ups, small businesses, and entities with assets worth less than ₹1 crore, the resolution period is shorter—90 days—with a possible extension of 45 days. This faster process helps smaller businesses resolve financial distress without prolonged uncertainty.
These timelines are designed to prevent the long delays that were common under previous laws, ensuring that decisions are made while there is still value left in the business.
Initiation of the Process
The insolvency process begins when an application is filed by a financial creditor, operational creditor, or the debtor itself. This application is submitted to the relevant adjudicating authority, which varies depending on the nature of the debtor:
- For companies and limited liability partnerships, the National Company Law Tribunal (NCLT) handles the case.
- For individuals and partnership firms, the Debt Recovery Tribunal (DRT) has jurisdiction.
The adjudicating authority must decide within 14 days whether to admit or reject the application. This swift decision-making prevents unnecessary delays in initiating the resolution process.
Regulatory Oversight
The Insolvency and Bankruptcy Board of India (IBBI) is the main regulatory body overseeing the implementation of the code. It is responsible for registering and regulating insolvency professionals, insolvency professional agencies, and information utilities.
The board comprises ten members, including representatives from the Ministry of Finance, the Ministry of Law, and the Reserve Bank of India. This mix ensures a broad range of expertise in overseeing the insolvency framework.
The IBBI also issues regulations, monitors compliance, and takes disciplinary action against professionals or entities that violate the provisions of the code.
Licensed Insolvency Professionals
Insolvency professionals play a central role in the resolution process. Once the process begins, these licensed individuals take control of the debtor’s assets and operations. They are responsible for managing the business during the resolution period, collecting claims from creditors, and preparing a resolution plan.
These professionals act independently and are expected to safeguard the interests of all stakeholders. Their neutrality is critical, as they must balance the sometimes competing interests of creditors, employees, and the debtor.
Adjudicating Authorities
To ensure specialized handling of cases, the code has created two separate adjudicating authorities:
- The National Company Law Tribunal (NCLT) for companies and LLPs.
- The Debt Recovery Tribunal (DRT) for individuals and partnership firms.
This separation allows for a more efficient and focused approach, as each tribunal can develop expertise in the specific types of cases it handles. Appeals against NCLT decisions are heard by the National Company Law Appellate Tribunal (NCLAT), while appeals against DRT decisions go to the Debt Recovery Appellate Tribunal (DRAT).
Step-by-Step Corporate Insolvency Resolution Process
The Corporate Insolvency Resolution Process (CIRP) is the procedure followed when a company faces insolvency. The major steps include:
- Filing of application by a financial creditor, operational creditor, or the corporate debtor itself.
- Admission or rejection of the application by the NCLT within 14 days.
- Appointment of an Interim Resolution Professional (IRP) to take charge of the company’s operations.
- Public announcement inviting claims from creditors.
- Verification of claims and formation of the Committee of Creditors (CoC).
- Preparation and submission of a resolution plan by prospective resolution applicants.
- Approval of the resolution plan by at least 66% of the CoC.
- Implementation of the approved plan or initiation of liquidation if no plan is approved.
During this process, the management of the company is suspended, and promoters have no control over operations. However, the IRP may seek assistance from the existing management to ensure smooth day-to-day functioning.
Time-Bound Nature of the Process
One of the key innovations of the IBC is the strict enforcement of timelines. The idea is to prevent the loss of value that occurs when insolvency cases drag on for years. By resolving cases within a fixed period, creditors can recover more of their dues, and viable businesses can be revived before their value erodes.
For example, a company that is still operational but struggling with debt can be revived quickly under the IBC, avoiding the prolonged decline that often occurred under the old system. On the other hand, if revival is not possible, the business is liquidated swiftly so that assets can be sold and proceeds distributed.
Liquidation Process
If the resolution process fails or the creditors do not approve any resolution plan, the company goes into liquidation. In liquidation, the assets of the debtor are sold, and the proceeds are distributed among creditors according to a predefined order of priority.
The priority order typically starts with insolvency resolution costs, followed by secured creditors, employees’ dues, and other unsecured creditors. Shareholders or owners receive any remaining amount, though in most cases little or nothing is left for them.
Restrictions on Resolution Applicants
The code includes specific restrictions to prevent misuse of the resolution process. Certain categories of individuals and entities are barred from submitting a resolution plan. These include:
- Wilful defaulters.
- Promoters or management of the debtor with non-performing loans for over a year.
- Directors who have been disqualified under the Companies Act.
Additionally, the code prohibits selling the assets of a defaulting debtor to such disqualified persons during liquidation. This ensures that those responsible for mismanagement cannot regain control of the business or its assets at a discounted value.
Impact of the Insolvency and Bankruptcy Code
Since its implementation, the IBC has had a significant impact on India’s credit and business environment. Lenders now have a powerful tool to recover dues, which has improved the credit culture. Borrowers, aware of the strict timelines and loss of control during insolvency, are more inclined to settle debts promptly.
The introduction of licensed insolvency professionals has also improved the quality and neutrality of decision-making. By involving trained specialists, the process remains transparent and fair to all parties involved.
Internationally, the IBC has boosted India’s ranking in the ease of doing business index, particularly in the parameter of resolving insolvency. Investors now view India as having a more predictable and efficient framework for dealing with financial distress.
The Insolvency and Bankruptcy Code 2016 is a landmark reform that has transformed the way insolvency cases are handled in India. By unifying multiple laws into a single framework, introducing strict timelines, and involving trained professionals, it has made the process faster, more transparent, and more effective.
Its emphasis on either reviving viable businesses or liquidating them without unnecessary delay protects the value of assets and promotes a healthier credit environment. While challenges remain in its implementation, the code has undoubtedly brought much-needed discipline and efficiency to India’s insolvency resolution system.
Introduction to the Governance Structure of the Insolvency and Bankruptcy Code
The Insolvency and Bankruptcy Code 2016 is more than just a set of rules for resolving financial distress. It is supported by a well-defined governance structure that ensures transparency, accountability, and professional handling of insolvency cases. This governance system is designed to create confidence among creditors, protect debtors’ rights, and maintain a balance between the interests of all stakeholders.
At the heart of this system is a combination of regulatory authorities, adjudicating bodies, and licensed professionals who work together to ensure that the process functions smoothly. Each component of this structure has a clearly defined role, and their coordinated functioning is essential for achieving the code’s objectives.
The Insolvency and Bankruptcy Board of India
The Insolvency and Bankruptcy Board of India (IBBI) is the primary regulatory authority under the code. It was established to oversee the functioning of insolvency processes across the country. The IBBI plays a critical role in setting the rules, monitoring compliance, and ensuring that the professionals involved in the process act with integrity and competence.
The board has multiple functions:
- Registering and regulating insolvency professionals, insolvency professional agencies, and information utilities.
- Issuing regulations and guidelines for conducting insolvency proceedings.
- Monitoring and enforcing compliance with the provisions of the code.
- Conducting investigations and taking disciplinary action against violators.
Composition of the Board
The IBBI is designed to have a diverse and expert-driven composition. It consists of ten members, including representatives from the Ministry of Finance, the Ministry of Law, and the Reserve Bank of India. This ensures that the board has the right mix of legal, financial, and administrative expertise to handle complex insolvency issues.
The presence of government representatives and experts also ensures that policy decisions are in alignment with the broader economic goals of the country.
Regulatory Responsibilities of the IBBI
The IBBI has the authority to regulate every entity involved in the insolvency process. This includes:
- Insolvency professionals who manage cases.
- Insolvency professional agencies that act as self-regulatory bodies.
- Information utilities that collect and store financial information for use in insolvency proceedings.
By maintaining a strict regulatory environment, the IBBI ensures that all participants in the process meet high professional standards and that cases are handled efficiently.
Licensed Insolvency Professionals
Licensed insolvency professionals are the backbone of the insolvency resolution process. Once an insolvency case is admitted, the appointed professional takes control of the debtor’s assets and operations. Their role is to act impartially and work toward the best possible outcome for creditors and the debtor.
Key responsibilities of insolvency professionals
- Managing the debtor’s assets during the resolution process.
- Collecting and verifying claims from creditors.
- Ensuring the business continues operating where possible.
- Preparing and presenting resolution plans to the Committee of Creditors (CoC).
- Overseeing the implementation of the resolution plan once approved.
Insolvency professionals must be members of an insolvency professional agency, which ensures their adherence to ethical and professional standards. They are also subject to disciplinary proceedings by the IBBI if they violate the code’s provisions.
Insolvency Professional Agencies
Insolvency professional agencies (IPAs) act as self-regulatory bodies for insolvency professionals. They are responsible for enrolling members, setting professional standards, and monitoring the conduct of their members.
While the IBBI provides overall regulation, IPAs handle day-to-day oversight, training, and capacity building of insolvency professionals. This two-tiered regulatory system ensures that professionals remain competent and up to date with the latest developments in insolvency law and practice.
Information Utilities
Information utilities (IUs) are another key element in the governance framework of the IBC. Their main purpose is to collect, store, and authenticate financial information from creditors and debtors.
This information plays a critical role in insolvency proceedings by:
- Providing a reliable source of verified data.
- Reducing disputes over the amount of debt owed.
- Allowing faster admission of insolvency applications.
The use of information utilities ensures that all parties have access to accurate and authenticated financial records, which minimizes delays and disputes.
Adjudicating Authorities
The IBC has established specialized adjudicating authorities to handle insolvency cases. This specialization allows for faster and more consistent decision-making, as judges and members of these tribunals develop expertise in insolvency matters.
For corporate entities, including companies and limited liability partnerships, the National Company Law Tribunal (NCLT) serves as the adjudicating authority. For individuals and partnership firms, the Debt Recovery Tribunal (DRT) performs this function.
National Company Law Tribunal
The NCLT handles all corporate insolvency resolution processes, liquidation, and bankruptcy cases involving companies and LLPs. Its functions include:
- Accepting or rejecting insolvency applications.
- Appointing interim resolution professionals.
- Approving or rejecting resolution plans.
- Ordering liquidation if the resolution process fails.
Debt Recovery Tribunal
The DRT deals with insolvency cases involving individuals and partnership firms. Its primary functions mirror those of the NCLT but are tailored to non-corporate entities.
Both NCLT and DRT are required to make quick decisions to ensure the time-bound nature of the process is maintained.
Committee of Creditors
The Committee of Creditors (CoC) is an essential decision-making body in corporate insolvency resolution. Once the insolvency process begins, the IRP collects claims from creditors and forms the CoC.
The CoC consists primarily of financial creditors, who have the power to:
- Approve or reject resolution plans.
- Decide on the extension of the resolution period.
- Opt for liquidation if they believe revival is not feasible.
A resolution plan requires the approval of at least 66% of the voting share of the CoC. This ensures that significant creditor support is needed for any major decision.
The Role of Interim and Resolution Professionals
At the start of the insolvency process, an Interim Resolution Professional (IRP) is appointed. The IRP’s initial tasks include taking control of the debtor’s assets, collecting creditor claims, and forming the CoC.
Once the CoC is formed, it may decide to continue with the IRP as the Resolution Professional (RP) or appoint a new one. The RP then takes over the responsibility of preparing a resolution plan and ensuring its implementation if approved.
The RP must act with neutrality, balancing the interests of creditors and the debtor, and must avoid conflicts of interest.
Oversight and Accountability
One of the strengths of the IBC is its focus on accountability. Insolvency professionals are required to act in the best interests of all stakeholders and are subject to strict codes of conduct.
If a professional is found guilty of misconduct, the IBBI has the authority to impose penalties, suspend licenses, or permanently bar them from practice. This ensures that the process remains transparent and that stakeholders can trust the integrity of the system.
The Interplay Between Regulators, Tribunals, and Professionals
The insolvency framework under the IBC operates through the combined efforts of regulatory bodies, adjudicating authorities, and licensed professionals. The IBBI sets the rules, registers and regulates professionals, and monitors compliance. The tribunals adjudicate cases, while insolvency professionals implement the process on the ground.
This coordinated approach reduces the chances of procedural delays and conflicting decisions. Each participant has a well-defined role, and the entire system is designed to move cases forward in a time-bound manner.
Ensuring Transparency in the Process
Transparency is a cornerstone of the IBC. All major steps in the insolvency process, including the appointment of professionals, public announcements for claims, and the approval of resolution plans, are conducted in a transparent manner.
Creditors are kept informed at every stage, and the CoC meetings provide a platform for discussing and deciding the future of the debtor. This openness builds trust among stakeholders and prevents disputes.
Training and Capacity Building
Given the technical and complex nature of insolvency proceedings, continuous training for insolvency professionals, tribunal members, and regulatory staff is essential. The IBBI and IPAs conduct regular training programs, workshops, and examinations to ensure that all participants are up to date with legal developments and best practices.
These capacity-building efforts have been crucial in maintaining the quality and efficiency of the insolvency resolution system.
Challenges in Governance and Regulation
While the governance structure of the IBC has been largely effective, it faces some challenges:
- High case loads for NCLT and DRT have sometimes caused delays.
- Shortage of experienced insolvency professionals in certain regions.
- Resistance from promoters and management during the resolution process.
- Complexities in valuing assets and securing approvals for resolution plans.
Efforts are being made to address these issues through reforms, additional appointments, and better infrastructure.
The Impact of Effective Governance
A well-governed insolvency framework has a direct impact on the ease of doing business. By ensuring that financial distress is addressed quickly and fairly, the IBC has improved creditor confidence and reduced the risk associated with lending and investment.
Effective governance also encourages entrepreneurship by providing a fair and predictable exit mechanism for businesses that fail. This allows entrepreneurs to take calculated risks without the fear of being trapped in prolonged financial disputes.
The governance and regulatory framework of the Insolvency and Bankruptcy Code is one of its strongest features. With the IBBI as the central regulator, specialized adjudicating authorities, professional oversight through IPAs, and the active role of licensed insolvency professionals, the system is designed to ensure fairness, speed, and transparency.
While challenges remain in terms of capacity and procedural efficiency, the coordinated functioning of these institutions has already transformed India’s insolvency resolution landscape. By continuing to strengthen governance, build professional capacity, and improve infrastructure, the code can deliver even greater benefits to creditors, debtors, and the overall economy.
Introduction to the Insolvency Resolution Journey
The Insolvency and Bankruptcy Code 2016 is designed to take a financially distressed entity from the stage of default to either revival or closure in a structured, time-bound manner. This process, known as the insolvency resolution journey, is one of the core elements of the code. It ensures that creditors can recover their dues efficiently, debtors get a fair chance to restructure or settle their obligations, and viable businesses are given the opportunity to continue operations.
The journey involves multiple stages—each with defined responsibilities, deadlines, and participants. While the process is similar in principle for both corporate and individual debtors, the specific mechanisms vary depending on the type of entity involved.
Initiation of Insolvency Proceedings
The journey begins when an application for initiating insolvency proceedings is filed before the relevant adjudicating authority. This application can be filed by three categories of applicants:
- Financial creditors, such as banks or lenders.
- Operational creditors, such as suppliers of goods or services.
- The debtor itself, whether a company, partnership, or individual.
The application must include proof of default, which is often supported by authenticated records from information utilities. Once filed, the adjudicating authority—either the National Company Law Tribunal (NCLT) for corporate debtors or the Debt Recovery Tribunal (DRT) for individuals and partnerships—must decide within 14 days whether to admit or reject the application.
If admitted, the insolvency resolution process formally commences, and certain legal protections and restrictions come into effect.
Moratorium and Its Significance
Once insolvency proceedings are admitted, a moratorium is declared. This is a legally binding period during which:
- No new legal cases can be filed against the debtor.
- Existing legal proceedings are halted.
- Creditors cannot take possession of the debtor’s assets or enforce security interests.
The moratorium serves two important purposes:
- It prevents the piecemeal dismemberment of the debtor’s assets by individual creditors.
- It provides a breathing space for the insolvency professional to assess the situation and prepare a resolution plan.
The moratorium remains in effect for the duration of the insolvency resolution process, which is typically 180 days, extendable by 90 days.
Appointment of Interim Resolution Professional
When insolvency proceedings are admitted, the adjudicating authority appoints an Interim Resolution Professional (IRP). The IRP takes control of the debtor’s management and assets, effectively replacing the existing management team.
The IRP’s responsibilities during the initial phase include:
- Taking inventory of the debtor’s assets and liabilities.
- Collecting claims from creditors.
- Verifying the validity of claims.
- Convening the first meeting of the Committee of Creditors (CoC).
This early phase is crucial for setting the tone of the resolution process and ensuring that the debtor’s assets are preserved for the benefit of all stakeholders.
Formation of the Committee of Creditors
The Committee of Creditors is formed by the IRP based on verified claims from financial creditors. Operational creditors do not typically have voting rights in the CoC, though they can attend meetings and express their views.
The CoC is the main decision-making body during the corporate insolvency resolution process. It has the power to:
- Approve or reject resolution plans.
- Decide on the replacement of the IRP with a Resolution Professional (RP).
- Authorize extensions to the resolution period.
- Vote for liquidation if revival is not possible.
Decisions of the CoC require approval from creditors representing at least 66% of the voting share.
Appointment of Resolution Professional
In the first CoC meeting, creditors may decide to either confirm the IRP as the permanent Resolution Professional (RP) or appoint a new RP. The RP’s role is more expansive than the IRP’s, as it involves preparing and implementing a resolution plan.
The RP must work in a neutral manner, balancing the rights of all creditors while ensuring the debtor’s assets are managed efficiently. The RP also invites prospective resolution applicants to submit plans for reviving the debtor.
Preparation of the Resolution Plan
The resolution plan is a comprehensive proposal for how the debtor’s financial distress will be resolved. It may involve restructuring debt, selling assets, changing management, or other measures aimed at restoring viability.
Resolution applicants, which may include other companies, investors, or consortiums, submit their plans to the RP. These plans are evaluated based on feasibility, viability, and compliance with legal requirements.
Once the RP selects the best plan, it is presented to the CoC for approval. At least 66% of voting creditors must approve the plan for it to move forward.
Approval by the Adjudicating Authority
After CoC approval, the resolution plan is submitted to the adjudicating authority (NCLT or DRT) for final approval. The tribunal examines the plan to ensure it complies with the provisions of the code, protects the interests of stakeholders, and is feasible to implement.
If approved, the plan becomes binding on all parties, including creditors, debtors, and other stakeholders. The RP then oversees the implementation of the plan until completion.
Failure of Resolution and Liquidation
If no resolution plan is approved within the maximum permitted timeframe (180 days plus a possible 90-day extension), the debtor proceeds to liquidation. Liquidation may also occur if the CoC votes for it early in the process.
During liquidation:
- A liquidator is appointed to take control of the debtor’s assets.
- Assets are valued and sold.
- Proceeds are distributed among creditors according to a legally defined order of priority.
The priority order begins with covering insolvency resolution costs, followed by secured creditors, employee wages, unsecured creditors, and finally shareholders.
Restrictions on Resolution Applicants
To maintain the integrity of the process, the code bars certain individuals and entities from submitting resolution plans. These include:
- Wilful defaulters who have intentionally not repaid loans.
- Promoters or management of the debtor with overdue non-performing loans for over a year.
- Directors disqualified under the Companies Act.
These restrictions prevent those responsible for mismanagement from regaining control of the business or its assets through the resolution process.
Amendments Strengthening the Code
Since its enactment, the IBC has undergone several amendments to improve its efficiency and close loopholes. Some key changes include:
- Introducing a faster resolution process for small businesses and start-ups.
- Clarifying the rights and voting powers of different categories of creditors.
- Tightening eligibility criteria for resolution applicants.
- Expanding the role of information utilities to ensure accurate financial data.
These amendments reflect the dynamic nature of insolvency law and the need to adapt to emerging challenges.
Impact on Credit Recovery
One of the most significant impacts of the IBC has been the improvement in credit recovery rates. Before the code, lenders often faced lengthy and uncertain recovery processes that could stretch over a decade. The time-bound structure of the IBC has reduced recovery times dramatically, making lending less risky and more attractive.
Banks and other financial institutions now have a credible mechanism to recover dues, which has improved the overall credit culture in the country.
Effect on Business Behaviour
The strict provisions of the IBC have also influenced business behaviour. The possibility of losing control over the company during insolvency proceedings has encouraged many promoters to settle debts before proceedings begin. This has led to an increase in out-of-court settlements, further reducing the burden on tribunals.
Moreover, companies have become more cautious in managing their debt, knowing that prolonged defaults can quickly lead to insolvency proceedings.
Economic and Investor Confidence
Internationally, the IBC has improved India’s standing in the ease of doing business rankings, particularly in the area of resolving insolvency. This has made the country a more attractive destination for investment.
Investors take confidence from the fact that there is a clear, efficient mechanism for dealing with financial distress. This predictability reduces the perceived risk of investing in Indian businesses.
Challenges in Implementation
Despite its successes, the IBC still faces certain challenges:
- Overburdened tribunals leading to delays in some cases.
- Shortage of experienced insolvency professionals in certain regions.
- Complex valuation issues in cases involving large or unique assets.
- Resistance from promoters who may attempt to block resolution efforts.
Addressing these challenges requires continuous improvement in infrastructure, training, and legal provisions.
Future Directions for the IBC
Going forward, the IBC is likely to evolve further to address these challenges and improve efficiency. Potential future developments may include:
- Expanding digital processes to reduce paperwork and delays.
- Increasing the use of pre-packaged insolvency resolution plans, especially for small businesses.
- Strengthening the capacity of tribunals through more appointments and better technology.
- Enhancing the role of information utilities to provide more real-time financial data.
These steps will help ensure that the code continues to deliver on its promise of swift, fair, and transparent insolvency resolution.
Conclusion
The insolvency resolution journey under the Insolvency and Bankruptcy Code is a structured process that balances the rights of creditors and debtors while ensuring the efficient use of resources. From the filing of an application to the final outcome whether revival through a resolution plan or liquidation the code sets clear rules and deadlines for every stage.
Its emphasis on time-bound resolution, professional management, and transparent decision-making has transformed India’s insolvency landscape. While challenges remain, ongoing reforms and improvements in governance are steadily strengthening the system.
By maintaining its focus on efficiency, fairness, and adaptability, the IBC will continue to play a critical role in fostering a healthy business environment, encouraging investment, and supporting economic growth.