Economic growth depends not only on investment but also on the ability of markets to resolve financial distress efficiently. Before 2016, India’s framework for dealing with insolvency and bankruptcy was scattered across multiple laws such as the Companies Act, the Sick Industrial Companies Act, and the Recovery of Debts Due to Banks and Financial Institutions Act. These laws were slow, overlapping, and often resulted in delayed recoveries and wasted assets. The Insolvency and Bankruptcy Code (IBC), 2016 was introduced as a revolutionary step to consolidate insolvency laws, ensure time-bound resolution, and improve India’s global ranking in ease of doing business.
In the years since its enactment, the IBC has transformed the way India deals with corporate distress. Yet, it has also attracted criticism for sometimes prioritizing liquidation over revival, and for creating bottlenecks at the National Company Law Tribunal (NCLT). This article explores the key features of the IBC, its judicial interpretations, its successes, and its shortcomings, while asking whether it has truly achieved its goal of corporate rescue or whether liquidation remains the dominant outcome.
Objectives of the IBC
The primary objectives of the IBC are:
- Time-bound resolution: Insolvency resolution processes are to be completed within 180 days, extendable to 330 days in exceptional cases.
- Maximization of value: To protect and maximize the value of assets of distressed companies.
- Balancing interests: To balance the rights of creditors and debtors.
- Promoting entrepreneurship: By providing a safety net, the IBC encourages risk-taking.
- Credit discipline: Defaulting companies and promoters face strict consequences, discouraging wilful defaults.
Institutional Framework
The IBC introduced specialized institutions to implement its provisions:
- Insolvency and Bankruptcy Board of India (IBBI): Regulates insolvency professionals and processes.
- Insolvency Professionals (IPs): Neutral intermediaries who take over management during insolvency resolution.
- National Company Law Tribunal (NCLT): The adjudicating authority for corporate insolvency.
- Committee of Creditors (CoC): Comprised mainly of financial creditors, it decides whether a company should be revived or liquidated.
Key Judicial Precedents
Judicial interpretation has been central to shaping the IBC.
- Swiss Ribbons Pvt. Ltd. v. Union of India (2019): The Supreme Court upheld the constitutional validity of the IBC, recognizing its aim to revive companies rather than merely liquidate them. It stressed that the Code balances creditors’ rights with corporate rescue.
- Essar Steel India Ltd. v. Satish Kumar Gupta (2019): The Court held that the commercial wisdom of the Committee of Creditors is paramount in approving resolution plans, with minimal judicial interference. This judgment reinforced creditor primacy.
- ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (2018): Clarified the eligibility criteria under Section 29A, which disqualifies defaulting promoters from bidding for their own companies, preventing misuse of the process.
- Innoventive Industries Ltd. v. ICICI Bank (2017): The first major ruling under the IBC, it established that insolvency proceedings are creditor-driven and can be initiated upon default.
These precedents show how the judiciary has balanced the IBC’s dual goals of revival and creditor recovery.
Successes of the IBC
The IBC has achieved several milestones:
- Improved recoveries: Average recovery rates increased significantly compared to pre-IBC mechanisms.
- Reduced delays: Though still facing bottlenecks, resolution under the IBC is faster than older systems.
- Better credit culture: Fear of losing management control has discouraged wilful defaults.
- Foreign investment confidence: Global investors see the IBC as a sign of improved business climate in India.
Notable resolutions include the sale of Bhushan Steel to Tata Steel and Essar Steel to ArcelorMittal, which preserved companies as going concerns while satisfying creditors.
Criticisms and Challenges
Despite its achievements, the IBC faces criticisms:
- High liquidation rate: A large proportion of cases end in liquidation rather than revival, raising questions about whether the IBC is a rescue mechanism or just a liquidation tool.
- Delays: NCLTs are burdened with massive backlogs, leading to processes exceeding the mandated timelines.
- Operational creditors’ concerns: The focus on financial creditors sidelines the interests of small suppliers and employees.
- Haircuts for banks: Resolution often involves significant write-offs by banks, raising concerns about moral hazard.
- Section 29A rigidity: While aimed at preventing misuse, it sometimes excludes genuine promoters who could have revived the company.
IBC During the COVID-19 Pandemic
The economic distress caused by COVID-19 forced the government to suspend fresh insolvency filings for a year. This highlighted the tension between protecting businesses in extraordinary times and ensuring creditor rights. The suspension was criticized for leaving creditors without remedies, but it also prevented mass bankruptcies.
Balancing Rescue and Liquidation
The central question remains whether the IBC is truly promoting corporate rescue. While many companies have been revived, the liquidation rate remains high, especially among smaller enterprises with fewer assets. Some argue that liquidation is inevitable for non-viable firms and that the IBC should not be judged solely on revival rates. Others emphasize that more needs to be done to facilitate genuine restructuring, especially for medium and small enterprises.
Comparative Perspective
Globally, insolvency frameworks emphasize rescue over liquidation. The US Bankruptcy Code, for instance, allows companies to restructure debt and continue operations under Chapter 11. European jurisdictions too are increasingly adopting pre-packaged insolvency and restructuring frameworks. India may need to evolve in this direction, with more emphasis on pre-insolvency restructuring and creditor-debtor cooperation.
Conclusion
The Insolvency and Bankruptcy Code, 2016 marked a watershed in India’s economic reforms. It consolidated fragmented laws, created an efficient institutional framework, and sent a strong signal that financial discipline is non-negotiable. Judicial support through landmark judgments has upheld its constitutional validity and clarified its processes.
Yet, challenges remain. High liquidation rates, NCLT backlogs, and significant haircuts for creditors reveal that the IBC’s promise of corporate rescue is only partially realized. The Code is still evolving, and reforms are needed to strengthen restructuring mechanisms, protect small creditors, and expand pre-insolvency solutions.