IBC Revisit Needed, in Law and Practice

IBC Revisit Needed, in Law and Practice

Why in News

The Insolvency and Bankruptcy Code (IBC), introduced in 2016 as one of India’s most significant financial reforms, has been instrumental in reshaping the corporate insolvency resolution framework. However, recent debates and experiences have highlighted that the system, while robust, is facing several procedural, institutional, and mindset challenges that hinder its effectiveness. Amendments are being discussed to fix delays in resolution by National Company Law Tribunal (NCLT), empower government agencies, and streamline processes. Experts now emphasize that the IBC must be revisited in both law and practice to make the system faster, more efficient, and better aligned with the needs of modern corporate insolvency.

Introduction

The Insolvency and Bankruptcy Code was enacted to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. Its main objective was to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders.

In the years since its implementation, the IBC has seen considerable success—recovering significant value from stressed assets, improving investor confidence, and creating a more structured framework for insolvency resolution. However, the system is now plagued by increasing delays, bottlenecks, shortage of trained insolvency professionals, and excessive litigation.

For example, a Corporate Insolvency Resolution Process (CIRP) was expected to be completed within 330 days. In practice, it now takes an average of 820 days, almost three times longer than the law originally envisioned. Similarly, liquidation, which was designed to be a time-bound process, now takes around 650 days on average. These delays dilute the effectiveness of the Code, reduce recovery values for creditors, and discourage investments.

This growing gap between intent and implementation has sparked calls for systemic reforms. The need of the hour is not just minor amendments but a comprehensive revisit of the IBC in both law and practice to restore its efficiency.

Key Issues and Background

1. Procedural Delays

The most critical issue with IBC today is the delay in resolution. Cases often drag on for years due to insufficient benches in NCLT, excessive litigation by promoters, and delays in regulatory approvals. This has eroded confidence in the system.

2. Shortage of Judges and Professionals

India currently has over 4,520 insolvency professionals, but the number of judges is drastically low at around 50 judges for 360 benches. The disproportion between caseload and judicial capacity makes speedy resolution nearly impossible.

3. Value Destruction

Long timelines destroy enterprise value. For instance, promoters often wait years before approaching IBC, by which time the company’s assets have already depreciated. Data shows that CIRP takes more than 2 years in many cases, resulting in lower recovery rates.

4. Role of Stakeholders

The behaviour of insolvency stakeholders, including creditors, resolution professionals, and debtors, has not always been conducive. Banks often act more like bureaucrats than business decision-makers, while corporate debtors frequently misuse the system to delay repayment.

5. Need for Mindset Change

The Code was designed not merely as a liquidation tool but as a mechanism for resolution and turnaround. However, in practice, many stakeholders still view liquidation as the default solution. This approach defeats the very purpose of the IBC.

Specific Impacts or Effects

1. Credit Market Impact: The delays and inefficiencies reduce recovery rates for creditors. Although the IBC has recovered around 16% of claims in liquidation, this remains far below potential.

2. Economic Impact: Delayed resolution ties up significant capital in stressed assets, reducing liquidity in the economy and limiting banks’ ability to lend further.

3. Investor Confidence: A slow insolvency system discourages both domestic and foreign investors. Global investors demand faster, more predictable resolution processes.

4. Impact on Businesses: Companies undergoing insolvency face reputational loss, operational disruption, and uncertainty for employees and suppliers.

5. Judicial Burden: The National Company Law Tribunal is overburdened with cases, slowing down not just insolvency but also other corporate matters like mergers and restructuring.

Challenges and the Way Forward

1. Strengthening Institutional Capacity

• Increase the number of NCLT benches and judges.

• Train and appoint more insolvency professionals with turnaround and crisis management skills rather than just legal knowledge.

2. Improving Procedural Efficiency

• Enforce strict adherence to deadlines in CIRP and liquidation.

• Encourage pre-pack insolvency schemes where resolution can be initiated before the situation worsens.

3. Changing Stakeholder Behaviour

• Creditors must adopt a more commercial outlook rather than a purely bureaucratic one.

• Corporate debtors should face stricter consequences for misusing legal provisions to delay repayment.

4. Enhancing Regulatory Role

• The Insolvency and Bankruptcy Board of India (IBBI) should become a stronger regulator with oversight across all aspects of the law.

• Encourage transparency and accountability in the appointment and conduct of resolution professionals.

5. Promoter Accountability

• Self-filing provisions for promoters should be encouraged, but with safeguards against misuse.

• Promoters should not be allowed to regain control at a deep discount without genuine restructuring.

6. Pre-Pack and Cross-Border Insolvency

• Introduce clear rules for pre-packaged insolvency, especially for small and medium enterprises.

• Implement a robust cross-border insolvency framework to deal with multinational cases.

Conclusion

The Insolvency and Bankruptcy Code has been one of the most impactful financial reforms in independent India. It has improved credit culture, increased accountability, and brought hope for faster resolution of stressed assets. However, after nearly a decade, cracks in the system have become evident.

Delays, inefficiencies, and lack of institutional readiness have limited its potential. If India is to achieve its aspiration of becoming a $5 trillion economy and a global investment hub, insolvency reforms must be a top priority. The solution lies not only in legal amendments but also in changing institutional behaviour and professional mindset.

Revisiting the IBC in both law and practice can transform India’s corporate insolvency framework into a model of efficiency, fairness, and global competitiveness.

5 Questions and Answers

Q1. What is the Insolvency and Bankruptcy Code (IBC)?
The IBC is a legal framework introduced in 2016 to consolidate insolvency laws in India and provide a time-bound process for resolving insolvency of companies, partnerships, and individuals.

Q2. Why is the IBC currently facing challenges?
IBC faces challenges due to procedural delays, shortage of judges, overburdened tribunals, misuse by debtors, and lack of trained insolvency professionals.

Q3. What is the average time taken for resolution under IBC today?
While the law mandates resolution within 330 days, in practice it now takes around 820 days on average, leading to value erosion.

Q4. What reforms are being suggested to improve the IBC?
Reforms include increasing the number of judges, promoting pre-pack insolvency schemes, ensuring stricter adherence to deadlines, improving promoter accountability, and introducing cross-border insolvency laws.

Q5. Why is revisiting the IBC important for India’s economy?
A strong insolvency system boosts credit flow, improves investor confidence, reduces non-performing assets, and supports India’s goal of becoming a global economic powerhouse.