Insolvency and Bankruptcy Code (IBC), 2016

Introduction

The Insolvency and Bankruptcy Code (IBC), 2016 is a landmark legislation in India that consolidates and amends existing insolvency laws to provide a time-bound process for resolving insolvency for companies, partnerships, and individuals. Enacted by the Parliament of India and enforced by the Insolvency and Bankruptcy Board of India (IBBI), the IBC seeks to simplify and expedite the process of insolvency and bankruptcy proceedings, thereby improving India’s business climate and ensuring creditor confidence.

Background and Evolution of IBC

• Before the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, India’s insolvency framework was fragmented across multiple laws like the Companies Act, Sick Industrial Companies Act (SICA), and Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI), among others. This led to delays, low recovery rates, and mounting non-performing assets (NPAs).
• To address these challenges, the Bankruptcy Law Reforms Committee (BLRC) was formed in 2014, which proposed a unified insolvency legislation.
• The IBC was passed by Parliament in May 2016, bringing about a consolidated and time-bound process for insolvency resolution, thus marking a transformative shift in India’s credit and business ecosystem.

Timeline	Development
2001	J.J. Irani Committee formed to reform insolvency laws
2014	Bankruptcy Law Reforms Committee (BLRC) constituted
May 2016	IBC enacted by Parliament
December 2016	IBBI (Insolvency regulator) established
2017-2023	Multiple amendments for MSMEs, homebuyers, pre-packaged insolvency

Objectives of IBC

• Ensure timely resolution of insolvency
• Maximize value of debtor’s assets
• Promote entrepreneurship and credit availability
• Balance interests of all stakeholders
• Improve ease of doing business in India

Key Features of the Insolvency and Bankruptcy Code

• Unified Legal Framework:
  • Consolidates various laws related to insolvency and bankruptcy into a single, comprehensive code.
• Time-Bound Resolution:
  • Mandates completion of the corporate insolvency resolution process (CIRP) within 180 days, extendable up to 330 days.
• Creditor in Control Model:
  • Transfers control from the defaulting debtor to a Committee of Creditors (CoC) for resolution decision-making.
• Moratorium Period:
  • Automatically halts all legal proceedings and enforcement actions against the debtor upon admission of the case.
• Appointment of Insolvency Professionals (IPs):
  • Independent professionals manage the debtor’s affairs during the resolution or liquidation process.
• Establishment of Adjudicating Authorities:
  • NCLT handles corporate insolvency; DRT manages individual and partnership insolvency cases.
• Creation of Information Utilities (IUs):
  • Digitally store financial information to support quick verification of claims and defaults.
• Priority Waterfall Mechanism:
  • Clearly defines the order of payments during liquidation, giving priority to secured creditors and workmen dues.

Feature	Description
Single Law	Unifies insolvency laws under one framework
Time-Bound Resolution	Corporate insolvency resolution to be completed in 180 days (extendable to 330 days)
Insolvency Resolution Professional (IRP)	Independent professionals manage resolution
Committee of Creditors (CoC)	CoC of financial creditors decides resolution
Moratorium	Legal protection period to halt legal actions against the debtor
Information Utilities (IUs)	Store financial information of firms to facilitate process
Adjudicating Authority	NCLT for companies; DRT for individuals and partnerships

Process of Corporate Insolvency Resolution

Step	Action	Time Limit
1	Application by financial/operational creditor or debtor	–
2	Admission/Rejection by NCLT	Within 14 days
3	Appointment of IRP & Moratorium begins	Within 7 days
4	Formation of CoC & appointment of Resolution Professional (RP)	Within 30 days
5	Submission of Resolution Plan	Within 180 days (extendable to 330 days)
6	CoC votes on plan (≥66%)	–
7	Approval by NCLT or Liquidation	–

Key Institutions under IBC

Institution	Role
Insolvency and Bankruptcy Board of India (IBBI)	Regulates insolvency professionals and agencies
National Company Law Tribunal (NCLT)	Adjudicates insolvency of companies
Debt Recovery Tribunal (DRT)	Adjudicates insolvency of individuals/partnerships
Insolvency Professionals (IPs)	Manage resolution/liquidation processes
Information Utilities (IUs)	Store debtor-creditor information

IBC and Different Stakeholders

Stakeholder	Benefit Under IBC
Creditors	Time-bound recovery mechanism
Debtors	Opportunity for business revival
Investors	Improved transparency and exit options
Banks/NBFCs	Reduced NPAs, better recovery rates
Employees	Protection of jobs in resolution phase

IBC and Homebuyers (Amendment 2018)

• Homebuyers categorized as financial creditors
• Can be part of the Committee of Creditors (CoC)
• Improved their ability to recover money from defaulting developers
• Boosted trust in real estate projects

Pre-Packaged Insolvency Resolution Process (PIRP)

Introduced in 2021 to facilitate insolvency of MSMEs quickly and cost-effectively.

Feature	Details
Eligibility	MSMEs with defaults ≤ ₹1 crore
Initiated By	Debtor with approval from 66% of unrelated financial creditors
Duration	Completion in 120 days
Objective	Minimize disruption to business and reduce cost

Impact of IBC on India’s Economy

Indicator	Before IBC	After IBC
Average Recovery Rate	25%	45-50%
Average Time to Resolve Case	4.3 years	~1.6 years
Ease of Doing Business Rank (2016 to 2020)	130 → 63	–
Confidence in Credit Market	Low	Significantly Improved

Challenges Faced by IBC

1. Delays in NCLT proceedings due to backlog
2. Complexity in large resolution plans
3. Lack of sufficient Insolvency Professionals
4. Repeated litigation and judicial interventions
5. Low realization in some liquidations

Amendments and Reforms under IBC

Amendment Year	Key Provisions Introduced
2017	Banned wilful defaulters/promoters from bidding
2018	Included homebuyers as financial creditors
2019	Mandated resolution within 330 days
2021	Introduced Pre-Pack Insolvency for MSMEs
2023	Fast-track mechanism for startups and small companies proposed

Way Forward

1. Digitalize NCLT processes
2. Expand capacity and staffing at tribunals
3. Encourage global best practices
4. Enable cross-border insolvency provisions
5. Stronger deterrents for frivolous litigation

Conclusion

The Insolvency and Bankruptcy Code, 2016 has revolutionized India’s insolvency landscape. By shifting the focus from “debtor in possession” to “creditor in control,” IBC has made debt recovery more efficient and transparent. Despite facing implementation hurdles, IBC stands as a critical reform toward a robust and resilient financial ecosystem in India. As it continues to evolve, the code holds the potential to not just clean up bad debts but also foster a more responsible credit culture.