IBC Amendment Fixes Key Gap, Creates Some New Ones

The latest amendments to the Insolvency and Bankruptcy Code are welcome, for the most part. Further, the sterling work turned in by the Select Committee to which the bill had been referred after it was introduced must be recognised. It serves to blunt the edge of the conclusion that Parliament has ceased to serve any effective purpose after the arrival of brute majorities that have effectively transmuted MPs into ventriloquist’s dummies rather than voice of reason or conscience while considering the affairs of the nation.

The purpose of a Corporate Insolvency Resolution Process is to cure a company defaulting on servicing its loans of insolvency and get it back on its feet and running. In India, it has been treated as a recovery mechanism for lenders, rather than for corporate turnaround. According to the Insolvency and Bankruptcy Board of India, of the 8,833 applications for insolvency resolution admitted by the National Company Law Tribunal, 6,954 have been concluded, of which a whopping 42% have resulted in liquidation (Insolvency and Bankruptcy News, vol 37, October-December 2025).

Even on the recovery front, the IBC’s performance has been less than stellar. Of the total creditors’ claims admitted of ₹12.99 trillion, recoveries have totalled to 31% of the claims, banks suffering a haircut of 69%. The process is supposed to get over in 180 days, with an extra 90 days as a grace period. Instead of concluding in nine months as planned, most CIRPs drag on for years. The average time taken for insolvency resolution other than liquidation has been 883 days, and in the case of liquidation, the process has stretched, on average, to 888 days.

From a public policy perspective, IBC has been less than a solution to the problem of bad loans. Companies access the public’s savings deposited with banks as loans, over-invoice project costs, more often than not, divert funds to promoter pockets through convoluted routes, and leave the companies unable to service their loans, that is, pay interest and repay the principal, as promised. Sometimes, the inability to service loans is masked for a period by taking fresh loans to service existing ones.

Banks are still obliged to repay depositors. After carrying the bad loans on their books for some time, banks dip into their capital and reserves to make good the losses. The government uses public funds to recapitalise the banks.

Sometimes, companies are unable to service their loans for reasons that are outside their control: the business cycle turns, a pandemic paralyses economies, someone starts a war that disrupts energy supplies, another creates a financial shock by invalidating high-value notes in circulation, etc. In such situations, the company management could potentially turn the company around, provided it gets a breather — a break from having to service their loans.

In the US, companies can file for bankruptcy under Chapter 11, and if a judge finds the management’s turnaround plan reasonable, it can give the company a finite period of respite from servicing its debt. Companies often emerge from bankruptcy restored to health.

Indian bankruptcy law did not have a provision for corporate turnaround under the management that defaulted on debt service. Even in the case of voluntary filing of bankruptcy, a resolution professional is appointed to run the affairs of the company and look after the interests of the lenders. Resolution professionals are mostly chartered accountants who pass an additional set of exams to qualify as RPs.

CAs are, without doubt, magnificent people with intimate knowledge of the working of company finances, and dedicated to the cause of transparency and honesty. Some people might demur. But no one can dispute that CAs are not trained to run companies. The name of a company turned around by a CA-turned-RP would be a question for a high-school quiz competition on par with the name of a flightless bird that has gone extinct.

Companies are best turned around by professional managers. And the best managers are often incumbent managers who have the most to lose from a company turning from a profit-machine into a waste pit. Creditors would do themselves and other company stakeholders a favour by giving such managers, with a vested interest in turning the company around, a chance to revive the company.

Till now, the IBC did not allow that. The latest IBC amendment law fixes many procedural loopholes, empowers the government to make rules for group insolvencies and cross-border resolution, gives creditors greater control over the liquidation process, and seeks to streamline resolution timelines. But the biggest change is a provision for Creditor-Initiated Insolvency Resolution Process.

The nomenclature is imprecise: after all, all insolvency resolution is initiated by those whom the company owes money but fails to pay — if you exclude the initial batch of 12, which were chosen by the RBI and initiated by creditor banks under regulatory duress. The main feature of the new CIIRP is that the incumbent management stays in control, under the watchful eye of a committee of creditors. This requires agreement among creditors and between creditors and the defaulting company, without the need for a formal court procedure, making for speed. The whole effort would still have legal recognition, because the process would now have recognition in the amended IBC.

There are some avoidable wrinkles, though. Only notified lenders and a notified class of borrowers would be eligible for CIIRP. But why? There is a rationale for limiting the kinds of lenders who can agree to a CIIRP. Promoters are perfectly capable of drumming up a series of lenders at short notice to take part in creditor decision-making to skew the process in favour of the promoters. But why restrict the kinds of borrowers who would be eligible for CIIRP?

Once only the right kind of lenders are allowed to initiate CIIRP, why should the government not give them the latitude to decide which all defaulters qualify for turnaround under incumbent managements? Restricting the eligibility of companies for CIIRP is regulatory excess characteristic of a rent-seeking bureaucracy.

One of the submissions by experts consulted by the Select Committee suggested introducing a Swiss challenge to the bidding process. In the Swiss challenge, an outside bidder can put in a higher bid, and existing bidders given a chance to match it. This would give creditors a higher level of recovery. The Select Committee ruled out the Swiss challenge on the advice of the Chairman of the Insolvency and Bankruptcy Board of India.

Restricting bids for control of the defaulting debtor to those who are interested in putting the assets to greater use in the same line of business might make sense, even if a potential asset-stripper might give greater cash upfront, and could be ready to come up with a Swiss challenge. So, ruling out a Swiss challenge in auctioning off a company as a going concern might make sense.

However, why should a Swiss challenge be ruled out in the case of liquidation? The IBBI and the Select Committee both stand guilty of failure to apply their mind on the matter.

It is possible to iron out these wrinkles in the days to come. The amended IBC is better than its original version.