The Insolvency and Bankruptcy Code: How It Changed the Way India Deals With Debt
Why We Needed a Better Way to Handle Insolvency
Until a few years ago, resolving corporate debt in India was a long, painful process. Banks were stuck with huge non-performing assets (NPAs), and businesses in financial trouble often dragged on for years without any resolution. That changed in 2016 when the Insolvency and Bankruptcy Code (IBC) came into force.
The IBC wasn’t just a legal reform — it was a game-changer. It brought much-needed clarity, structure, and speed to how insolvencies are handled, making India a more attractive destination for investors and improving the health of the financial system.
So, What Is the IBC All About?
At its core, the IBC is about giving failing businesses a fair shot at revival, or ensuring an efficient exit if revival isn’t possible. It applies to companies, partnerships, and even individuals, with the aim of resolving insolvency in a time-bound manner — ideally within 180 days (extendable to 330 days in complex cases).
The Code has a few key goals:
- Rescue viable businesses while protecting creditors.
- Maximize the value of assets.
- Promote entrepreneurship and investor confidence.
- Reduce the burden of bad loans on banks.
Here’s How It Works
When a company defaults on its payments, either the lender, the operational creditor, or the company itself can trigger the Corporate Insolvency Resolution Process (CIRP).
Once the CIRP begins:
- A licensed Insolvency Professional (IP) takes over management.
- A Committee of Creditors (CoC) is formed to evaluate and vote on resolution plans.
- If a plan is approved (by at least 66% of voting share), the company can be revived.
- If not, it goes into liquidation, where its assets are sold to repay debts.
What Changed After the IBC Came Into the Picture?
The results have been quite impressive:
- Faster resolutions (at least compared to earlier frameworks).
- Higher recovery rates for lenders.
- A culture shift: Borrowers are now more cautious about defaults, knowing the consequences could mean losing control of their business.
- Global credibility: India’s rank in the World Bank’s Ease of Doing Business report improved due in part to the IBC.
Real-Life Examples: Big Names, Big Lessons
Some of the biggest corporate debt cases in India have played out under the IBC framework:
- Essar Steel: One of the most high-profile resolutions, where ArcelorMittal acquired the company after months of legal battles.
- Bhushan Steel: Successfully taken over by Tata Steel, giving lenders a significant recovery.
- Jet Airways: The first airline to go through insolvency under IBC, bringing international dimensions into the picture.
These cases showed that the IBC could handle large, complex, and even cross-border insolvencies.
Not Without Challenges
Of course, no system is perfect. The IBC has its share of hurdles:
- Delays are still common, especially when cases get stuck in litigation.
- Many companies end up in liquidation, raising questions about the effectiveness of the process.
- Huge “haircuts” for banks (sometimes recovering only 10–20% of their dues) have sparked criticism.
- Capacity issues at tribunals like NCLT are slowing things down.
What’s Changing: Updates You Should Know
The IBC is still evolving. Recent steps include:
- Pre-packaged insolvency for MSMEs — a faster, more informal resolution mechanism.
- Discussions around a cross-border insolvency framework, crucial for companies with international operations.
- Push for digital filings and hearings to reduce delays.
Final Thoughts: A Work in Progress, But a Step in the Right Direction
The Insolvency and Bankruptcy Code is far from perfect, but it’s a major leap forward. It replaced a broken system with one that’s more transparent, structured, and aligned with global best practices.
India is still fine-tuning the process — with amendments, judicial interpretations, and stakeholder feedback helping shape its future. But the foundation is strong, and the IBC has already made a lasting impact on India’s financial and business landscape.