INSOLVENCY AND BANKRUPTCY CODE: EFFECTIVENESS AND FUTURE PROSPECT

ABSTRACT

The Indian insolvency regime has undergone a historic change with the introduction of the insolvency and bankruptcy code 2016. This paper empirically analysis this effectiveness of the code in the Indian economy. This paper also studies the insolvency frameworks that exits in India the distinguishing  features and the legal framework of the code. The analysis of the current  status of the Indian insolvency regime with timeless and cross-sectional data clarifies the non-performing assets trajectory, recovery rates and time required  under different recovery mechanism , a summary of cases under the new code and the status of India in the international insolvency systems. The empirical evidence of this study suggests that the code is an improvement over its procedure in terms of recovery rates, resolution of non-performing assets and resolution costs, the code should be subjected to necessary improvements to evolve  and become a full proof mechanism. Suggestions to that effect are offered in the final section.

KEYWORDS: Insolvency, bankruptcy,, IBC 2016,India, liquidation, non-performing assets

INTRODUCTION

The insolvency and bankruptcy code bill was drafted by a specially constituted “Bankruptcy Law Reform Committee”( BLRC) under the Ministry of Finance. The Insolvency and Bankruptcy code was introduced in the Lok Sabha on 21 December 2015 and was subsequently referred to a joint committee of Parliament. The Committee submitted its recommendations and the modified code was passed by Lok Sabha on 5 May 2016.The code was passed by Rajya Sabha on May 2016 and it received the presidential assent on 28 May 2016. The Insolvency and Bankruptcy Code, 2016 consolidate the existing framework by creating a single law for Insolvency and Bankruptcy.

The 2016 Code provides for a time-bound process to resolve Insolvency. When a default in repayment occurs, creditors gain control over the debtor’s within 180 days. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The Code applies to companies, partnerships, limited liability partners, individuals and any other body which the central government may specify. Section 2 of the Insolvency and Bankruptcy Code 2016 as Amended vide the Insolvency and Bankruptcy Code( Amendment) Act, 2018 provides that the provisions of the code shall apply to-

(a)  Any company incorporated under the companies act, 2013 or under any previous company law,

(b) Any other company governed by any special act for the time being in force,

(c) Any limited liability partnership incorporated under the Limited Liability Partnership Act, 2008,

(d) Such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf,

(e) Personal guarantors to corporate debtors,

(f) Partnerships firms and proprietorships firms; and

(g) Individuals, other than persons referred to in clause (e)

WHAT IS INSOLVENCY AND BANKRUPCY?

• The term “Insolvency” denotes the state of one whose assets are insufficient to pay his debts; or his general inability to pay his debts. The term “Insolvency” is used in a restricted sense to express the inability of a party to pay his debts as they become due in the ordinary course of business.
• The word “Bankruptcy” denotes a legal status of a person or an entity who cannot repay debts to creditors. The bankruptcy process begins with filing of a petition in a court or before an appropriate authority designated for this purpose. The debtor’s assets are then evaluated  and used to pay the creditors in accordance with law.
• The word “Bankruptcy” denotes a legal status of a person or an entity who cannot repay debts to creditors. The bankruptcy process begins with filing of a petitions in a court or before an appropriate authority designated for this purpose. The debtor’s are then evaluated and used to pay the creditors in accordance with law.
• Section 7 of the Insolvency and Bankruptcy Code, 2016 lays down the procedure for the initiation of the corporate insolvency resolution process by a financial creditor or two or more financial creditors jointly.

HAS IBC BEEN AN EFFECTIVE RECOVERY MECHANISM?

Akshat  Khetan, Founder, AU Corporate Advisory and Legal Services, pointed out that IBC has changed the underlying credit  culture. As the Supreme Court once observed, “the defaulter’s paradise is lost” and the Code has created a credible threat that ensures timely repayment.

On the recovery rate of 32.8%, Mr. Khetan pointed out that it must be interpreted in light of the distressed nature of the assets that come into the IBC process, often after years of erosion.

As the National Company Law Appellate Tribunal has rightly remarked in one of its rulings, “IBC is not a recovery mechanism; it s a resolution framework.” compared  to legacy systems, where recovery rates were often below 20%  with timeless extending into decades, a 32.8% realization is a leap forward, he said.

Mr. Khetan also stated that the statistic does not capture qualitative gains, such as job preservation, improved enterprise value, and restored investor confidence. In a framework designed to balance resolution over liquidation, the broader economic impact of IBC far outweighs numerical recovery alone, he said.

The provisions of the IBC have been prompted debtors to take early action in distress situations, marking a shift in their behavior. National Company Law Tribunal (NCLT) data show that 30,310 cases were settled prior to admission, covering underlying defaults worth 13.78 lakh crore till December 2024 

A study by the Indian Institute of Management, Bangalore, submitted to IBBI, said IBC has injected discipline in the credit allocation process and has prompted borrowers to adhere to stipulated payment schedules. The commercial banks have declined from a peak of 11.2% in march 2018 to 2.85 in March 2024. A part of that reduction is attributable to resolution process enabled under IBC, it said.

The study also indicated a 3% reduction in the cost of debt for distressed firms post-IBC, Compared to non-distressed firms, the IBC has had a positive impact on corporate governance, reflected in the increased proportion of independent directors on the boards of companies resolved under the Code.

RECENT REFORMS IN MOTION

The Government and legislature have continued to revise the Code to plug operational gaps and respond to judicial decisions. In 2024-2025 there has been an active reform trajectory:- regulatory clarifications from IBBI, executive changes to streamline compliance, and an Amendment Bill introduced in 2025 that seeks to recalibrate key aspects of CIRP, withdrawal, liquidation and cross-border coordination. These reforms aim to reduce judicial discretion. These reforms aim to reduce judicial discretion where it causes delays, tighten rules on withdrawals and protect bona fide resolution plans.

FUTURE PROSPECTS-WHERE THE IBC CAN EVOLVE

As India continues to evolve its insolvency and bankruptcy frame work, there are several areas where further reforms could enhance the IBC’s effectiveness:

• Retention of Business with Existing Management:

The role of existing management is crucial in pre-pack insolvency proceedings, as negotiations and bargaining typically take place before the formal commencement of insolvency. By allowing promoters and current management to initiate proceedings at the pre-default or early default stage, the process creates strong incentives for timely resolution. This framework not only enables the business to continue under familiar leadership but also secures creditor confidence, as creditors often prefer retaining existing management for ensuring continutity and safeguarding business value.

• Speedy and Cost –Effective Resolution:

Pre-packaged insolvency serves as a faster and more economical mechanism when compared to the conventional Corporate Insolvency Resolution Process CIRP). The essential steps- including negotiation, formulation, creditor approval of the resolution plan- are completed prior to the commencement of formal proceedings, there by streamlining the process. This not only reduces costs relating to insolvency professionals and legal representation but also curtails unnecessary procedural delays. Further, judicial intervention is limited, with the role of adjudicating authorities such as the National Company Law Tribunal  NCLT) largely confined to confirmation and oversight.  Importantly, this aligns with the core objectives of the Insolvency and Bankruptcy Code,2016- ensuring value maximization, promoting time-bound resolution, and preserving the viability of businesses while reducing the burden on the judicial system.

• Better Incentivisation and Standardization for Resolution Professionals: 

Raising professional standards training, minimum qualification, standard  fee frameworks and improving transparency in bidding process will attract more credible bidders and reduce bid- rigging or poor- quality plans.

• Business as a Going Concern:

Under this  the corporate debtor continues as a going concern under the control of existing management. Unlike post- application resolution, where failure f a viable plan may push the company towards liquidation, pre –packs safeguard continuity. Moreover, no moratorium is imposed as in applications under a sections 7,9 ,or 10 of the IBC.

• Data, technology and transparent marketplaces:

A unified electronic platform for asset auctions, real- time public dashboards, and richer data releases by IBBI/NCLT will reduce information asymmetry, improve price discovery for assets   and permit evidence- based policy calibration.

CONCLUSION

The Insolvency and Bankruptcy Code, 2016 has undoubtedly transformed India’s Insolvency frame work by ensuring timely resolution, improving creditor recoveries, and strengthening investor confidence. However, to sustain its effectiveness in the future, it is essential to address judicial delays, sector- specific challenges, and cross-border Insolvency gaps though targeted reforms. By reinforcing institutional capacity and adopting global best practices, the IBC can continue to serve as a robust mechanism for financial stability and economic growth in India.