Insolvency & Bankruptcy Code – Features, Achievements & Limitations – Explained Pointwise

Introduction:

• The Insolvency and Bankruptcy Code (IBC), enacted in 2016, is a landmark reform that consolidated and modernized India’s insolvency framework.
• Its main aim is to provide a unified, time-bound process for resolving insolvency and bankruptcy of corporates, individuals, and partnership firms, thereby improving overall financial sector health and creditor confidence.
• Insolvency refers to a situation where individuals or companies cannot repay back their outstanding debt obligations.
• Bankruptcy refers to a legal status declared by a court of competent jurisdiction for a person or entity that is insolvent i.e. unable to pay off debts.

Key Features of IBC:

• IBC covers individuals, companies, LLPs, and partnership firms under a single, consolidated framework, merging multiple earlier laws.
• Strict timelines: Resolution must be completed in 180 days (extendable to 330 days in special cases, including litigation). Special provisions for small companies and startups (90 days + 45 days).
• Committee of Creditors (CoC): Takes charge of decision-making during insolvency; professional insolvency resolution professionals are appointed to manage proceedings.
• Insolvency and Bankruptcy Board of India (IBBI): Regulates professionals and agencies, sets standards, and oversees proceedings.
• Adjudicating Authorities:
  • National Company Law Tribunal (NCLT) for companies/LLPs.
  • Debt Recovery Tribunal (DRT) for individuals/partnerships.
• Cross-border Insolvency Provisions: Includes enabling provisions for handling insolvency of multinational companies operating in India.

Objectives of IBC:

• Consolidation & Amendment of Insolvency Laws: Merge and streamline multiple, outdated insolvency and bankruptcy laws under a single, comprehensive code for individuals, companies, LLPs, and partnership firms.
• Facilitate time-bound resolution: Ensure fast and predictable outcomes for insolvency cases (180–330 days), minimizing value erosion and maximizing asset recovery for creditors.
• Maximise Value of Assets: Prevent value depletion for stressed companies or individuals by encouraging restructuring, sale, or liquidation in a manner that realizes maximum possible returns.
• Promote Entrepreneurship: By making exit easy and non-punitive, IBC encourages risk-taking, business innovation, and investment, fostering a dynamic entrepreneurial ecosystem.
• Protect interests of Creditors & other Stakeholders: Structure processes to balance the interests of financial creditors, operational creditors, employees, government dues, and other stakeholders fairly.
• Improve Ease of Doing Business: By offering clarity, predictability, and a speedy resolution process, IBC elevates India’s reputation for contract enforcement and dispute management, making it more attractive for investment.
• Reduce NPAs & Boost Credit Supply: Provide an effective mechanism for addressing bad loans and stressed assets, strengthening the financial system and allowing for more responsible credit creation.
• Establishment of Regulatory Mechanism: Establish the Insolvency and Bankruptcy Board of India (IBBI) to regulate insolvency professionals and agencies, ensuring ethical, efficient, and accountable practice.

Why was IBC needed?

1. Fragmented & Outdated Insolvency Laws: Prior to IBC, insolvency and bankruptcy were governed by multiple, overlapping laws and forums, causing confusion, delays, and high costs for resolution. Lack of clarity led to conflicting legal interpretations and inefficiency in resolving business distress.
2. Prolonged Resolution Time & Value Erosion:
   • Average insolvency resolution in India took over 4 years, in contrast to 1–1.5 years in developed countries.
   • Long proceedings caused value erosion of assets and discouraged genuine business restructuring.
3. Mounting NPAs & Stressed Assets: Banks and financial institutions suffered from rising non-performing assets (NPAs) and mounting bad debts. Ineffective recovery mechanisms left creditors with little recourse and led to growing economic risks.
4. Poor Ease of Doing Business:
   • India’s low ranking in the World Bank’s Ease of Doing Business index was partly due to cumbersome exit processes for distressed firms.
   • Investors and entrepreneurs were deterred by unpredictable and costly insolvency procedures.
5. Strengthening Credit Discipline & Market Confidence: The absence of strong recovery laws allowed for poor credit discipline and willful defaulting, harming India’s banking sector and overall business climate.
6. Need for Modern, Unified, Creditor-friendly Framework:
   • Global best practices demanded a unified, quick, and transparent framework that empowers creditors and ensures fair outcomes for all stakeholders.
   • Encouraging entrepreneurship, risk-taking, and a robust financial market needed time-bound exits and non-punitive resolution processes.

Achievements of IBC:

1. Improved Recovery Rates & Resolution Timelines:
   1. Average recovery rate for creditors has increased to 32–45%, up from ~20% before IBC.
   2. Strict timelines (180–330 days) have accelerated stressed asset resolution and asset value preservation.
2. Rescue & Settlement of Companies:
   1. As of March 2025, IBC has helped rescue 1,194 companies through resolution plans and led to creditors recovering ₹3.89 lakh crore.
   2. Over 30,000 cases (worth ₹13.8 lakh crore) were settled before admission, showing IBC’s deterrent effect against defaults.
3. Dominant Recovery Channel: IBC contributed 48% of all bank recoveries in FY 2023–24, outperforming SARFAESI (32%), DRTs (17%), and Lok Adalats (3%).
4. Behavioral Change & Improved Credit Discipline:
   1. The threat of losing control over businesses via IBC has prompted debtors to repay dues and improved overall credit discipline in the banking system.
   2. Pre-admission settlements indicate companies now act early to resolve distress.
5. Strengthening Banking Sector & Asset Quality: Significant contribution to reducing non-performing assets (NPAs): gross NPAs declined from 11.2% in March 2018 to 2.8% in March 2024. Banks have freed up locked capital for redeployment and healthier lending.
6. More Robust Credit Market: IBC has made the Indian market more attractive to investors, especially in distressed asset deals, creating greater transparency and predictability.

Challenges/Limitations of IBC:

1. Case Backlog & Delays:
   1. Despite strict timelines (180–330 days), real-world resolution frequently exceeds deadlines due to limited judicial capacity, procedural complexities, and multiple legal challenges.
   2. Limited benches at National Company Law Tribunal (NCLT) and appellate tribunals create bottlenecks.
2. Low Recovery for Certain Assets: Although average recovery improved, some sectors and cases deliver lower-than-expected recoveries, especially where asset quality is poor or liquidation proceeds are limited for e.g. Agricultural and service-based enterprises often face distinct liquidation challenges.
3. Structural Issues in Credit Markets:
   1. Banks exhibit risk aversion, preferring secured over unsecured lending, and delay initiating insolvency to maximize loan lifetimes, reducing early resolution incentives.
   2. Non-Banking Financial Companies (NBFCs) and informal creditors remain less integrated into the insolvency framework.
4. Delay in Resolution Plan Approvals: Resolution plans sometimes face resistance, litigation, or withdrawal, causing significant delays and uncertainty for creditors and employees.
5. Impact on MSMEs & Startups: The insolvency process can be costly and intimidating for small and medium enterprises and startups, which may opt for informal settlements or closure.
6. Incomplete Creditor Participation: Non-financial creditors often feel underrepresented or sidelined in decision-making by the Committee of Creditors (CoC), impacting consensus and fair resolutions.

Way Forward:

1. Strengthen Judicial & Institutional Capacity:
   1. Expand the number of dedicated NCLT benches and National Company Law Appellate Tribunal (NCLAT) members to reduce case backlog and expedite resolution.
   2. Enhance training for judges, insolvency professionals, and related authorities to handle complex insolvency cases efficiently.
2. Simplify Legal & Procedural Framework:
   1. Streamline multiple legal provisions and reduce overlaps with sector-specific laws to minimize litigation and conflicting appeals.
   2. Introduce fast-track insolvency resolution mechanisms for MSMEs and startups with simplified procedures.
3. Improve Credit Participation & Transparency:
   1. Ensure fair representation and participation of operational creditors and minority stakeholders in the Committee of Creditors (CoC).
   2. Promote transparency in resolution processes and encourage stakeholder consultations to build trust and consensus.
4. Enhance Awareness & Capacity Building:
   1. Launch nationwide awareness campaigns for debtors, creditors, and businesses about the benefits and processes of IBC.
   2. Increase the pool of qualified insolvency professionals and upgrade their skill sets through continuous professional development programs.
5. Foster Early Insolvency Detection & Resolution:
   1. Encourage early identification of financial distress through improved credit monitoring systems.
   2. Facilitate pre-insolvency frameworks and corporate debt restructuring schemes to prevent insolvency where possible.
6. Leverage Technology for Efficiency:
   1. Strengthen information utilities and digital platforms for collecting and authenticating financial data.
   2. Implement technology-enabled case management and monitoring systems to ensure transparency and real-time updates.

Conclusion:
IBC is a crucial piece of economic legislation that has modernized India’s bankruptcy laws, providing a much-needed framework for resolving financial distress and promoting a more robust and transparent credit market.