New Amendments to the Insolvency and Bankruptcy Code, A Path Towards Faster Resolutions

New Amendments to the Insolvency and Bankruptcy Code, A Path Towards Faster Resolutions

Introduction

The Indian government has recently introduced a bill in Parliament proposing amendments to the Insolvency and Bankruptcy Code (IBC) of 2016. This legislative move aims to address one of the most pressing concerns plaguing the IBC framework: the delay in resolving insolvency cases. While the IBC was introduced as a landmark reform to streamline corporate insolvency resolution, its practical implementation over the last eight years has revealed systemic bottlenecks.

The amendment bill has been referred to a select committee, which is expected to carry out detailed deliberations, engage with stakeholders, and ensure that the law’s provisions are balanced, effective, and capable of delivering on their promise. Of particular note is the bill’s provision for out-of-court resolution mechanisms — a move that could not only speed up proceedings but also reduce the burden on resolution professionals and judicial bodies.

The Current State of Insolvency Resolution in India

The Corporate Insolvency Resolution Process (CIRP) under the IBC was designed with strict timelines to ensure that insolvency cases are resolved swiftly, preserving asset value and reducing uncertainty. Under the law:

• The process is to be completed in 180 days.

• It can be extended by 90 days in special cases.

• Further extensions for legal proceedings can add up to 60 days more.

• This brings the maximum intended duration to about 330 days from the start of proceedings.

However, reality tells a different story. By 2024:

• Over 12,000 IBC cases were pending before the National Company Law Tribunal (NCLT).

• Average case durations exceeded 600 days in 2022–23 and 700 days in 2023–24.

• Recovery rates were modest — only about one-third of the claims made — with high recoveries concentrated in a small number of large cases.

• Finality has been elusive: many NCLT-approved resolutions have been challenged in appellate tribunals, and some high-profile cases have been overturned by the Supreme Court.

These figures reflect a substantial gap between legislative intent and operational reality. Delays erode asset value, extend uncertainty for creditors, and undermine business confidence.

The Core Challenges in the Current Framework

1. Judicial Backlog
   The NCLT has been overloaded with cases, contributing to prolonged timelines. Appeals and Supreme Court interventions further extend the process.

2. Overreliance on Resolution Professionals (RPs)
   The IBC framework has placed heavy reliance on RPs to manage insolvent companies. However, in many cases, RPs have been accused of slowing down the process or failing to meet expectations.

3. Rigid, Court-Centric Approach
   The requirement for formal court proceedings in most cases has limited flexibility and made out-of-court settlements rare.

4. Complexity in Cases with Multiple Jurisdictions
   Insolvency cases involving business groups with overseas assets or cross-border elements often face legal hurdles.

5. Lack of Specialized Handling for Unique Assets
   Certain leased assets — for example, aircraft taken on lease by airlines — have been frozen during insolvency, creating disruptions and cost spikes.

Key Features of the Proposed Amendments

The amendment bill seeks to address these issues through several notable provisions:

1. Out-of-Court Resolution for Creditor-Initiated Cases

One of the most significant proposals is to allow out-of-court negotiations and agreements in certain creditor-initiated insolvency cases. This approach:

• Lets the corporate debtor’s board of directors remain in place.

• Enables them to run the company under the guidance of an RP.

• Encourages early and direct engagement between creditors and the company’s management.

The rationale is simple: not all insolvency cases require full court intervention. If lenders and borrowers can agree on a plan quickly, the process can move faster, preserving business value and reducing costs.

2. Special Provisions for Complex Cases

The bill introduces provisions to facilitate the resolution of cases involving:

• Business groups with interconnected companies.

• Overseas assets, where international legal frameworks may need to be considered.

This is an important step, given the increasingly global nature of Indian companies’ operations.

3. Protection for Certain Leased Assets

The bill provides legal backing for excluding leased assets — such as aircraft leased by airlines — from the pool of frozen assets during bankruptcy.
This change:

• Aligns India with a global treaty that ensures leased planes remain operational.

• Helps avoid sharp increases in leasing costs for the aviation sector during insolvency.

4. Timely Admission of Resolution Pleas

The bill seeks to end delays in resolution plea admission by making a credit default sufficient grounds for initiating CIRP. This measure can prevent prolonged disputes over eligibility, speeding up case admission.

5. Strengthening the Insolvency and Bankruptcy Board of India (IBBI)

The IBBI’s regulatory powers will be expanded, potentially enabling more effective monitoring and enforcement. While the extent of these enhanced powers will depend on the final draft, the move is seen as a step towards better oversight.

Expected Benefits of the Amendments

1. Reduced Timelines
   Out-of-court processes could significantly cut down case durations, reducing the average from 600–700 days closer to the statutory limit.

2. Lower Litigation Burden
   Encouraging negotiated settlements can reduce the caseload of NCLT and appellate bodies.

3. Improved Asset Preservation
   Faster resolution means less deterioration of assets, which often lose value when left idle.

4. Sector-Specific Relief
   The aviation sector, in particular, stands to benefit from leased asset protection.

5. Better Global Alignment
   By harmonizing with international treaties and practices, India could boost investor confidence and facilitate cross-border resolutions.

Concerns and Limitations

While the amendments are promising, certain concerns remain:

• Risk of Management Misuse
  Allowing the corporate debtor’s management to remain in control could lead to misuse, as seen in the Chapter 11 bankruptcy system in the US, where some companies exploit the grace period to delay creditor action.

• Effectiveness of Out-of-Court Processes
  The success of such mechanisms depends on cooperation between creditors and debtors — something not always present in contentious cases.

• Judicial Oversight Still Needed
  Even with out-of-court settlements, mechanisms must be in place to prevent fraud, asset stripping, or unfair treatment of certain creditors.

• Supreme Court Interventions
  The Parliamentary panel may consider preventing the Supreme Court from interfering without strong evidence of miscarriage of justice, but this proposal may be contentious.

A Balanced Approach: Combining New and Existing Pathways

The amendment bill does not propose to abolish existing court-based processes; instead, it adds new options. The success of this hybrid model will depend on:

• Clear criteria for when out-of-court resolutions can be applied.

• Strong safeguards to protect creditors’ interests.

• Effective monitoring by the IBBI.

• Parallel reforms to streamline NCLT functioning.

Learning from International Examples

Several countries have implemented pre-packaged insolvency or debtor-in-possession models with success. The US Chapter 11 process, the UK’s pre-pack administration, and Singapore’s scheme of arrangement offer lessons in:

• Encouraging early negotiations.

• Balancing debtor control with creditor rights.

• Ensuring transparency and fairness.

However, these systems also show the risks of abuse if oversight is weak — a caution India must heed.

Conclusion

The proposed amendments to the IBC represent a strategic evolution of India’s insolvency framework. By introducing flexibility through out-of-court processes, addressing cross-border complexities, protecting key leased assets, and strengthening the IBBI, the bill aims to close the gap between statutory timelines and actual practice.

However, the reforms must be accompanied by institutional strengthening, capacity building at the NCLT, and robust safeguards against misuse. The IBC’s original promise — timely resolution, value preservation, and business revival — can only be realized if both the spirit and letter of these reforms are implemented effectively.

If successful, these changes could not only improve recovery rates but also restore confidence among domestic and global investors in India’s ability to handle corporate distress efficiently.

5 Exam-Oriented Q&As

Q1. What is the primary aim of the proposed amendments to the Insolvency and Bankruptcy Code (IBC)?
A: The main aim is to reduce delays in insolvency resolution, introduce out-of-court settlement options, improve flexibility in handling complex cases, protect certain leased assets, and strengthen the regulatory powers of the Insolvency and Bankruptcy Board of India (IBBI).

Q2. What are the current statutory timelines for resolving insolvency cases under the IBC, and how do they compare to actual timelines?
A: Statutorily, cases should be resolved within 180 days, extendable by 90 days, plus a further 60 days for legal proceedings — totaling 330 days. In practice, average durations were over 600 days in 2022–23 and over 700 days in 2023–24.

Q3. How does the amendment bill address insolvency cases involving leased aircraft?
A: It provides legal backing for excluding leased assets such as aircraft from frozen assets during bankruptcy, aligning India with global treaties that ensure such assets remain operational, thus preventing leasing cost spikes for airlines.

Q4. What are some potential risks of allowing corporate boards to remain in control during creditor-initiated cases?
A: Risks include potential misuse by incumbent management to delay creditor action, possible asset diversion, and exploitation of grace periods — similar to some abuses seen in the US Chapter 11 bankruptcy process.

Q5. How might the proposed out-of-court resolution mechanism improve efficiency in the insolvency process?
A: By enabling direct negotiations between creditors and debtors without prolonged court involvement, it could significantly shorten resolution times, reduce litigation costs, and preserve asset value — provided there is cooperation and adequate oversight.