Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC) has emerged as a crucial tool for debt recovery and fostering credit discipline in India. While it has significantly improved the resolution of corporate distress, its effectiveness is still hampered by persistent issues like judicial delays and legal uncertainties.¹

The Insolvency and Bankruptcy Code (IBC): An Overview

Enacted to unify and streamline insolvency and bankruptcy proceedings across various entities in India, the IBC aims to resolve corporate bankruptcy crises, consolidate related processes, and facilitate the revival of companies within a strict timeframe.² Its applicability extends to individuals, corporates, partnerships, Limited Liability Partnerships (LLPs), and personal guarantors of corporate debtors. The National Company Law Tribunal (NCLT) handles cases involving companies and LLPs, while Debt Recovery Tribunals (DRTs) manage those of individuals and partnership firms. A key feature is the Corporate Insolvency Resolution Process (CIRP), a time-bound mechanism for resolving corporate debtor insolvency.³

Successes of the IBC

The IBC has demonstrated considerable success:

• Dominant Recovery Channel: In FY 2023–24, the IBC accounted for 48% of total bank recoveries, surpassing other mechanisms like SARFAESI (32%), Debt Recovery Tribunals (17%), and Lok Adalats (3%). Notably, realisations have exceeded 170% of liquidation value.⁴
• High Pre-admission Settlements: As of December 2024, 30,310 cases were settled before formal admission into insolvency proceedings, covering defaults worth ₹13.78 lakh crore.⁵ This highlights the deterrent effect of the IBC, encouraging early resolution.⁶

Significance of the IBC

Beyond mere recovery, the IBC has brought about significant systemic improvements:

• Shift in Borrower Behavior: Promoters are now more inclined to avoid defaults to protect their control and reputation, given the threat of insolvency proceedings.
• Improved Credit Discipline: The code has fostered better repayment practices and early resolution, contributing to a substantial reduction in Gross Non-Performing Assets (NPAs) from 11.2% in FY18 to 2.8% in FY24.⁷
• Enhanced Corporate Governance: Research (e.g., an IIM-B study) suggests that resolved firms exhibit better corporate governance, with more independent directors and professional management.
• Lower Cost of Credit: Cleaner balance sheets and post-IBC restructuring have reduced risks for lenders, leading to an average 3% drop in borrowing costs for stressed firms.

Persistent Challenges

Despite its successes, the IBC faces critical challenges:

• Delayed Resolution: A significant hurdle is the insufficient judicial capacity, leading to delays even after Committee of Creditors (CoC) approval. As of March 2025, an ICRA report indicated that 78% of ongoing CIRP cases had exceeded the mandated 270-day timeline.⁸
• Post-Resolution Legal Uncertainty: Even after a resolution plan is approved and implemented, stakeholders frequently initiate further legal challenges, undermining finality.
• Gaps for New Business Models: The IBC lacks adequate provisions to handle the unique complexities of emerging business models, especially start-ups and technology-driven enterprises.⁹ This often results in suboptimal resolution outcomes for such firms.
• Unaddressed Aspects for Tech Firms: Key aspects like the valuation and transfer of Intellectual Property Rights (IPR), treatment of employee dues, and ensuring continuity of technology (e.g., licenses, data access) remain inadequately addressed within the current IBC framework for start-ups.

The Path Forward

To enhance the IBC’s effectiveness, several measures are crucial:

• Expand NCLT/NCLAT Capacity: Increase the number of judicial and technical members, digitize operations, and modernize case handling processes to expedite resolutions.
• Ensure Legal Finality and Predictability: Introduce codified safeguards to protect approved resolution plans from endless litigation.¹⁰ Foster judicial consensus on respecting the commercial decisions made by the Committee of Creditors (CoC).
• Promote Pre-Packaged Insolvency & Sector-Specific Frameworks: Encourage the use of pre-packaged insolvency resolutions, particularly for Micro, Small, and Medium Enterprises (MSMEs) and start-ups. Develop sector-specific norms for resolving insolvency in IPR-based and technology-intensive firms.
• Strengthen Investor Assurance Mechanisms: Provide clearer legal and regulatory assurances to boost investor confidence in the outcomes of insolvency resolutions.