Towards a fair, efficient insolvency regime

Source: The post “Towards a fair, efficient insolvency regime’” has been created based on “Towards a fair, efficient insolvency regime’”, published in “The Hindu” on 15th June 2026.

UPSC Syllabus: GS-3- Economy

Context: The Insolvency and Bankruptcy Code (IBC) was enacted to provide a time-bound insolvency resolution framework in India. The proposed 2026 Creditor-Initiated Insolvency Resolution Process (CIIRP) seeks to address financial distress while preserving business continuity. However, certain provisions have generated concerns regarding creditor equality and institutional fairness.

Background and Need for Reform

1. The IBC emerged as a response to inefficiencies under earlier frameworks such as the Sick Industrial Companies Act.
2. The creditor-in-control model under the IBC improved resolution outcomes but often resulted in procedural delays and prolonged litigation.
3. The CIIRP has been proposed to provide a less disruptive alternative to conventional liquidation and insolvency proceedings.

Key Features of the 2026 CIIRP

1. The CIIRP introduces a hybrid framework that combines debtor-in-possession arrangements with creditor oversight.
2. The company continues its operations under the supervision of a resolution professional, thereby preserving business value.
3. The amendment reduces judicial intervention and streamlines procedures through changes to Sections 54C to 54P.
4. The term “may” in Section 7(5)(a) has been replaced by “shall,” making admission or rejection of applications by the NCLT mandatory under specified conditions.
5. Only a class of financial creditors belonging to notified financial institutions can initiate the process.
6. Certain financial creditors are excluded from participation in restructuring negotiations.

Concerns and Challenges

1. Creation of Arbitrary Creditor Hierarchy

1. The amendment creates distinctions among financial creditors based on institutional identity rather than financial interest.
2. The approach departs from the principle laid down in the Swiss Ribbons judgment.

2. Disadvantages to Smaller and Non-Notified Creditors

1. Smaller financial and operational creditors may lose bargaining power during restructuring.
2. Non-notified creditors may be compelled to accept restructuring plans without meaningful participation.

3. Reduced Creditor Autonomy

1. Restricting initiation rights limits the ability of creditors to protect their interests.
2. The provision may give rise to constitutional and economic concerns.

4. Excessive Procedural Rigidity: Mandatory admission requirements may reduce judicial discretion in complex insolvency cases.

Way Forward

1. India should adopt a default-neutral initiation rule that does not depend on regulatory status.
2. Any financial creditor should be allowed to initiate proceedings subject to a minimum threshold of creditor support.
3. The insolvency framework should maintain safeguards against frivolous filings while preserving creditor neutrality.
4. Reforms should focus on financial interest rather than institutional identity.

Conclusion: The CIIRP introduces important debtor-in-possession features that can preserve business value and improve efficiency. However, the exclusion of certain creditors and the creation of institutional hierarchies may undermine fairness within the insolvency ecosystem. A universal CIIRP model based on financial interest rather than institutional identity would help India achieve a more efficient, inclusive, and balanced insolvency regime.

Question: Examine the key features of the 2026 Creditor-Initiated Insolvency Resolution Process (CIIRP) and assess its implications for India’s insolvency regime.

Source: The Hindu