Libertatem Magazine

Libertatem: Navigating Legal Perspectives

Do We Need to Transform the Indian Insolvency System?

Contents of this Page

The Insolvency and Bankruptcy Code has transformed insolvency legislation in India. It has replaced a rather inefficient bankruptcy legal regime and thus has helped instil a greater level of confidence in the corporate resolution methodology by making the insolvency process a sustainable, efficient, and value saving one. 

The Insolvency and Bankruptcy Board of India (IBBI) has established an organization that regulates and develops insolvency policy and assesses market realities. The IBC clubbed with other significant legislative reforms brought about in recent years such as the Goods and Services Tax regime is arguably responsible for improving India’s ease of doing business currency and is helping it emerge as a ‘Make for World’ platform. 

PM Modi credited these reforms brought about in recent years for creating a surge in Foreign Direct Investment in India in 2019-2020, of nearly $74.5 billion, which is a significant increase of about 20% from 2018-2019. The IBC focuses on a time-bound resolution, and not mere liquidation, as a tool of empowerment to support companies governed by it. It has been able to successfully instil a greater level of confidence in creditors for reacquiring their investments.

The central objective was to allow greater credit to flow more freely within India while promoting confidence between the investor and investee. The IBC was suspended for a limited duration due to the COVID-19 pandemic, in the present day and the long term will prove to have been a timely reform.

Need for a Reform in the Insolvency and Bankruptcy Code

There has been a longstanding need for a reform of the Insolvency and Bankruptcy system in India due to hurdles faced by the system. A reform in the IBC would be able to deal with the increasing number of backlog cases in the judicial system. Another factor that strengthens the need for a reformed insolvency regime is lowering the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala fide intent thereby decriminalizing minor offences, thus, benefiting judicial functioning.

Some of the criminal penalties that are punishable with imprisonment for minor offences act as major deterrents for investors, thus, the IBC has not used imprisonment for punishment for minor offences. The government thus established with the help of the reform brought about a difference between good-faith mistakes and intentional bad faith actions, to penalize the former, and criminalize the latter, to create a perceived deterrent free investment culture.  

Significance of the IBC

The most important characteristic of the IBC code is the creation of an increase in the ease of doing business measures in India. The IBC has helped exponentially in improving the ease of doing business in India and enabling it to emerge as a ‘Make for World’ platform. The IBC has transformed the insolvency regime in India at a structural level with significant reform in insolvency resolution. It has provided an increasing emphasis on a time-bound resolution as it focuses on a time-bound resolution, rather than liquidation, as an empowering tool to support companies falling within its ambit.

The new regime is responsible for successfully instilling confidence in the corporate resolution methodology and thus, has created an opportunity for the creditors to recoup some of their investments in firms being liquidated or going in for resolution.

Another landmark structural change is the creation of an institutionalized creditor-in-control mechanism through which the IBC provides for an institutionalized creditor-in-control mechanism for re-organization and insolvency resolution of corporate entities, including corporate debtors (CDs) and personal guarantors. Thus, there is an easy flow of credit within India as there is a substantial increase in investor and investee confidence.

Impact of COVID-19 on the IBC

With the spread of Covid-19 in India, some of the issues with the Insolvency and Bankruptcy Code came to the forefront. The first was that the MSMEs are now forced to go to Civil Courts as the government increased the minimum default amount to trigger corporate insolvency resolution from ₹1 lakh to ₹1 crore, to protect MSMEs from insolvency petitions.

Another problem observed is that Section 10A of IBC law provides that “no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March 2020 for six months or such further period. On the other hand, the proviso to the section states that no application for insolvency resolution shall ever be filed against a corporate debtor for any default occurring during the suspension period. While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope to provide complete amnesty under the IBC for any default occurring during such period.

Challenges Faced  under the IBC Regime

There were many other challenges faced by IBC, they are, the lack of enough number of resolution trained persons, information insufficiency or asymmetry; and the delays caused by multiple appeals and different verdicts at various levels of the judiciary. One of the greatest challenges to the regime under the IBC is the clogging of the 27 NLCT benches functioning around the country. The reasons for such clogging include the increasing financial stress in the economy and a low threshold for the IBC process to set in (the default of Rs.1 lakh), attracting a greater number of cases.

Other than delays caused by legal disputes, some issues need to be settled as the legal provisions are still in primal stages and thus require interpretation with respect to the spirit of the law and legislation. The Insolvency Professionals are the skeleton of the IBC as they are in charge of managing the debtors and are accountable to the creditors and the adjudicating authority for their actions. 

Addressing the Gaps in the IBC

To improve the functioning of the Code, the report of the Bankruptcy Law Reforms Committee suggests that there is a huge need for the speedy working of the bankruptcy code after it has been established. It has been suggested that the administration must look at institutionalizing the insolvency resolution process, the need for which is highlighted by the necessary suspension of the IBC proceedings. The use of technology would help create greater access to justice and increase the ease of doing business. The IBC 2020 ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic. The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.

The Way Forward: Development in the IBC?

The IBC is adaptive, dynamic, and flexible, thus making it highly impactful. It is a future sensitive and omnibus legislation. The IBC goes beyond other similar pieces of legislation across the world, and through the Insolvency and Bankruptcy Board of India (IBBI), it has established an unprecedented organization that both regulates and develops insolvency policy and assesses market realities. It has increased ease of doing business and investor-investee confidence which has led to a surge in entrepreneurship.

The code has lent unprecedented support to MSMEs. The reform in the IBC will continue to instil greater confidence in investors both foreign and domestic, thus making India an even more attractive destination for investment. The adequate institutional capacity is essential to ensure that the IBC does not suffer from the plights of earlier reform attempts such as the Debt Recovery Tribunals.


Libertatem.in is now on Telegram. Follow us for regular legal updates and judgments from the court. Follow us on Google News, InstagramLinkedInFacebook & Twitter. You can also subscribe to our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

About the Author