By Dr. M. Jayadev, Professor of Finance and Accounting, Indian Institute of Management Bangalore (IIMB)
A paradigm shift in India’s corporate ecosystem occurred with the enactment of the Insolvency and Bankruptcy Code (IBC) in May 2016. The law is grounded in creditor empowerment, time-bound resolution and protecting the economic value of corporate firms.
Historically, India’s Companies Act, 1956 provided the framework for dealing with corporate bankruptcy—but with multiple loose ends and lengthy processes, resulting in inordinate settlement delays. Such a lengthy process gave corporate promoters an advantage in avoiding loan repayments and accountability, and firms slipped into distress. In 1985, the government enacted the Sick Industrial Companies Act (SICA) and constituted the Board for Industrial and Financial Reconstruction (BIFR) as a judicial authority. This was primarily a debtor-in-possession mechanism; it hardly helped banks to recover loans, and banks had mountains of bad loans with little scope for loan recovery. Subsequently, two acts were introduced in 1993 and 2002 aimed at loan recovery and protecting the interests of secured creditors: the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act) (1993) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) (2002).
Despite these mechanisms, bad bank loans remained high, affecting capital supply and banks’ solvency. For the most part, promoters retained control over defaulting/distressed companies, and the interests of various stakeholders were ignored.
The objectives of the most recent law, as stated, are:
“An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith and incidental thereto.”
Although the IBC is modelled along the lines of UK bankruptcy law, it also draws on aspects of German and French laws. Largely, the IBC is more creditor-friendly than the more stringent UK bankruptcy laws.
For corporate debtors (CDs) facing insolvency, the Code spells out two processes: insolvency resolution (the Corporate Insolvency Resolution Process, or CIRP) and liquidation. When insolvency resolution is triggered under the IBC, all attempts are made to resolve the insolvency in a time-bound manner. If these attempts fail, the company—or the CD—will be liquidated. This is a significant departure from the previous winding-up regime, which did not provide for this two-stage, time-bound process.
Another departure from earlier laws is the replacement of a “debtor in possession” approach with a “creditor in control” regime. Hence, once the process starts, the powers of the existing board of directors are suspended, and, during the CIRP, a creditor-approved insolvency practitioner (IP) is appointed to manage the CD as a going concern. The IP functions under the overall control and supervision of the Committee of Creditors (CoC), which generally comprises the CD’s financial creditors.
The IBC is a collective mechanism for maximising the value of a CD’s assets for the benefit of creditors and all other stakeholders.
The IBC is a collective mechanism for maximising the value of a CD’s assets for the benefit of creditors and all other stakeholders.
Ecosystem of the IBC
The IBC works through an ecosystem consisting of the Insolvency and Bankruptcy Board of India (IBBI), the apex administrative body; the National Company Law Tribunal (NCLT), the adjudicating authority; and National E-Governance Services Ltd (NeSL), the information utility, which acts as a repository of financial information. Any appeals arising out of the NCLT are heard by the National Company Law Appellate Tribunal (NCLAT). Further, if any disputes persist at the NCLAT, they can be appealed to the Supreme Court of India.
The trigger event for the initiation of the bankruptcy proceedings (CIRP) is a loan default. Any default above ₹10 million is actionable under the IBC. All types of creditors, including unsecured operational creditors and borrowers themselves, can file for bankruptcy. In line with UK law, the incumbent management is dismissed, and the Committee of Creditors receives control over the firm during the bankruptcy process. The primary objective of the law is to maximise loan recovery.
Resolution professional (RP): The key stakeholder under the IBC ecosystem is the resolution professional (RP); the outcome of the resolution process reflects the RP’s expertise and proficiency. Once the application for insolvency is accepted by the court, the board of the corporate debtor is superseded, and the RP takes control of the distressed corporate debtor and discharges the duties of the managing director and chief executive officer, based on the advice of the CoC.
The IBBI has set out comprehensive regulations for RPs and undertakes several activities for their professional development. The resolution professional who manages the firm in the interim is appointed by the financial creditors and works under their supervision and the Committee of Creditors’ control. The CoC, which consists of all financial creditors, effectively acts as a corporate board during bankruptcy proceedings. Bankruptcy professionals licensed and regulated by the IBBI work as resolution professionals and oversee day-to-day management during bankruptcy. They also work toward finding bidders for the firm and collate the necessary details about all bids to facilitate decision-making by the CoC.
Committee of Creditors (CoC): The IBC ensures a bankrupt entity’s revival through resolution plans by restructuring the business operations. The acquiring entity must repay its debts to creditors; otherwise, the firm may be liquidated. The resolution process proceeds with minimal court intervention, and its success largely depends on the resolution professional’s and the Committee of Creditors’ commercial wisdom. Thus, the CoC considers the business’s potential, asset value and whether it can retain the status of a “going concern”, while protecting the interests of stakeholders, including suppliers, employees and operational creditors. During the resolution process, the company is under the CoC’s control. The IBC empowers both financial and operational creditors to file for insolvency with the court or the NCLT. Thus, each creditor has a claim against the company, but the CoC is constituted only of financial creditors; jurisprudence has clarified the priority rights of secured creditors over unsecured and other operational creditors.
Restricting corporate debtors’ vested interests and control: With suitable amendments to the Code, the defaulted owners’ ability to regain control is restricted. The enactment of Section 29A deems certain categories of persons ineligible to submit resolution plans, including those who contributed to the corporate debtor’s default along with their connected persons and related parties.
Homebuyers as creditors: Several of India’s real-estate developers have defaulted before delivering promised residential units to homebuyers. During the insolvency process, homebuyers are neither financial nor operational creditors, although they have paid the property developer and are waiting for occupancy of a residential unit. Subsequent amendments to the Code empowered such homebuyers as financial creditors; any amounts paid by them in advance were recognised as financial debt. The IBC has evolved as a shield for millions of homebuyers.
Withdrawal from the insolvency process: With suitable amendments, the IBC has facilitated the withdrawal of an application for insolvency made by operational or financial creditors or the corporate debtor, provided such an application for withdrawal was made with the approval of 90 percent of the CoC’s voting share.
Prepacked insolvency process: This is an alternative semi-formal distress-resolution mechanism aimed at addressing the financial distress of small and medium-sized enterprises (SMEs). Here, the corporate debtor proposes a plan to restructure its debts and operations, and then negotiates with financial creditors long before the creditors approach the court. Thus, the IBC facilitates out-of-court settlement mechanisms to protect the interests of various stakeholders and minimise bankruptcy costs.
Progress made
In 2017, the Reserve Bank of India (RBI), using its statutory powers, directed banks to initiate legal proceedings against the 12 largest firms with nonperforming assets (NPAs) of more than ₹50 billion. The submitted claims against those 12 companies were ₹2,495 billion (US$29.8 billion); the banks have recovered around 55 percent of their claims from these companies. The gross NPAs of Indian banks fell from 9.30 percent at the end of March 2017 to 2.20 percent by the end of March 2025.
IBBI data shows that in the last 10 years, 8,987 CIRPs were admitted; 1,419 were settled; and 3,003 cases went for liquidation. Creditors recovered ₹383 trillion—31.41 percent of admitted claims.
Out of 8,987 cases, 29 percent were settled either by withdrawal or by review and appeal, basically without court intervention. Sixteen percent of cases were resolved, and 33 percent liquidated assets.
The Code was operationalised by establishing the Insolvency and Bankruptcy Board of India, the regulator of insolvency professionals and valuers. The IBBI has evolved into a robust professional foundation for the effective implementation of the statutory code.
Impact of the IBC
A study by the Indian Institute of Management Ahmedabad (IIMA) showed that the average sales of firms under resolution improved substantially, with marginal improvement in operating profits. Of course, net margins were still negative. Also, post-resolution, firms increased capex (capital expenditure) and employee costs.
An IIMB (Indian Institute of Management Bangalore) study showed that the passage of the IBC injected discipline into the credit-allocation process and prompted borrowers to adhere to stipulated payment schedules. Creditors today have greater confidence in taking errant borrowers to task, even in cases of large overdue amounts. The implementation of the IBC by the regulator, the IBBI, has brought about significant behavioural changes in the credit ecosystem comprising corporates and banks. Credit monitoring has improved, overdue accounts have fallen in number, and firms’ debt use, especially long-term, has systematically declined.
The Insolvency and Bankruptcy Code has emerged as a cornerstone of India’s economic reforms by revitalising distressed businesses, preserving employment and strengthening economic stability across sectors.
The Insolvency and Bankruptcy Code has emerged as a cornerstone of India’s economic reforms by revitalising distressed businesses, preserving employment and strengthening economic stability across sectors. Beyond facilitating insolvency resolution, the IBC has significantly improved financial discipline by creating strong deterrents against defaults. The possibility of insolvency proceedings, loss of management control and adherence to strict resolution timelines encourages companies to avoid financial mismanagement, honour debt obligations and pursue timely corrective measures. As a result, the past perception of India as a “defaulters’ paradise” has largely disappeared. By fostering early intervention, cooperation among stakeholders and a structured resolution framework, the IBC has transformed corporate behaviour, enhanced creditor confidence and reinforced sound corporate-governance practices, making it a key driver of a more disciplined and resilient financial system.
The IBC’s ultimate objective should be the timely restructuring and revival of viable enterprises, rather than liquidation, wherever possible. By combining data-driven insights, technological innovation and effective enforcement, stakeholders can preserve enterprise value, strengthen the financial system and maximise the IBC’s contribution to sustainable economic growth.
Dr. M. Jayadev is a Professor of Finance and Accounting at the Indian Institute of Management Bangalore (IIMB) and the Shareholder Director of Union Bank of India. As an Associate Member of the Indian Institute of Bankers (IIB), he has advised banks on the Basel Accords and banking and risk management, and he is a recipient of the Indian Council of Social Science Research (ICSSR) and University Grants Commission (UGC) fellowships.