A watershed moment in India's economic reforms was the adoption of the Insolvency and Bankruptcy Code (IBC) in 2016. Prior to the IBC, India's insolvency system was fragmented, ineffective, and prone to prolonged delays. Creditors struggled to recover their debts, and failing businesses sat there for a long time without a good process for resolution. The IBC was designed to address these problems by introducing a streamlined and time-bound insolvency resolution mechanism. This article explores the history of insolvency and bankruptcy code, evolution of insolvency laws in India, leading up to the introduction of the IBC, and examines its impact on the financial and business ecosystem.
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The Pre-IBC Landscape
Prior to the IBC India's insolvency framework was dispersed across multiple laws, resulting in long insolvency delays, low recovery rates and inefficiencies that turned off creditors and hampered the revival of financially troubled businesses.
Multiple Laws and Fragmentation
Before the IBC, India had a host of laws dealing with insolvency and bankruptcy, each catering to different types of debtors. These included:
The Companies Act, 1956: Provided mechanisms for winding up of companies.
Sick Industrial Companies (Special Provisions) Act, 1985 (SICA): Created the Board for Industrial and Financial Reconstruction (BIFR) to rehabilitate sick companies.
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI): Established Debt Recovery Tribunals (DRTs) for speedy debt recovery by banks.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI): Allowed secured creditors to enforce their claims without court intervention.
The Provincial Insolvency Act, 1920, and The Presidency Towns Insolvency Act, 1909: Governed insolvency for individuals.
Problems with the Old Regime
These laws were riddled with inefficiencies:
Lengthy Proceedings: It often took years to resolve insolvency cases.
Low Recovery Rates: Creditors often recovered less than 25% of dues.
Lack of Coordination: Different laws and authorities led to confusion and conflicting outcomes.
Focus on Liquidation: The emphasis was on winding up, not reviving businesses.
In 2015, India did not do well on the "resolving insolvency" part of the World Bank's "Ease of Doing Business" index. Alarm bells went off in the business world and among policymakers.
The Road to Reform
The government knew that things had to change right away so they started a series of comprehensive reforms through expert committees. These led to the creation of a unified insolvency code which is meant to speed up cases and encourage creditor-driven resolutions.
Initial Steps
The government knew that things had to change right away so they started a series of comprehensive reforms through expert committees. These led to the creation of a unified insolvency code which is meant to speed up cases and encourage creditor-driven resolutions.
Key Recommendations of BLRC
The committee submitted its report in November 2015. Its major recommendations included:
Creation of a single comprehensive framework for insolvency and bankruptcy.
Time-bound insolvency resolution process (180 days).
Empowering creditors over debtors.
Establishment of Insolvency Professionals (IPs) and Insolvency and Bankruptcy Board of India (IBBI).
Prioritizing resolution and business revival over liquidation.
Enactment of the IBC, 2016
Based on the BLRC recommendations, the Insolvency and Bankruptcy Code, 2016 was introduced in Parliament and received Presidential assent on May 28, 2016.
Salient Features of IBC
The Insolvency and Bankruptcy Code introduced several groundbreaking provisions that streamlined the insolvency process, empowered creditors, and ensured faster resolution of financial distress across businesses and individuals.
Unified Law: It replaced multiple insolvency laws and consolidated them into one.
Applicability: Covers companies, LLPs, partnerships, and individuals.
Corporate Insolvency Resolution Process (CIRP): A time-bound process of 180 days (extendable by 90 days).
Insolvency Professionals (IPs): Neutral professionals manage the insolvency process.
Committee of Creditors (CoC): Creditors have the power to decide the fate of the debtor company.
National Company Law Tribunal (NCLT): Acts as the adjudicating authority for corporate insolvency cases.
Insolvency and Bankruptcy Board of India (IBBI): A regulator to oversee functioning and compliance.
Impact of the IBC
Since its enactment, the IBC has transformed India’s insolvency landscape by reducing resolution times, improving recoveries, instilling financial discipline, and boosting confidence among lenders and investors across the financial ecosystem.
Faster Resolution and Higher Recoveries
The IBC significantly reduced the time taken to resolve insolvency cases and increased the rate of recovery. The IBC has been shown to be effective at unlocking value and protecting jobs in well-known cases like Essar Steel, Bhushan Steel and Jet Airways.
Improved Credit Culture
IBC instilled financial discipline among borrowers. The fear of losing control over companies prompted many promoters to settle dues early, even before formal proceedings were initiated.
Boost to Investor Confidence
The streamlined insolvency framework improved India’s ranking in the World Bank’s Ease of Doing Business index. Foreign and domestic investors felt more secure about their rights.
Challenges and Reforms
Despite its success, the IBC has faced hurdles like procedural delays, legal bottlenecks and overburdened tribunals, prompting the need for continuous reforms to strengthen its effectiveness.
Delays in Resolution: Many cases exceeded the 180- or 330-day timeline due to litigation and complex structures.
Overloaded NCLTs: National Company Law Tribunals faced mounting caseloads, leading to backlogs.
Judicial Overreach: Frequent interventions by courts often stalled or reversed creditor decisions.
Limited Success in Individual Insolvency: Frameworks for individuals and partnerships remained underdeveloped.
Low Bidding Interest in Some Sectors: Certain industries saw limited interest from resolution applicants leading to liquidation.
Key Amendments and Updates
Over the years, several amendments and structural updates have been introduced to enhance the IBC’s efficiency, address gaps and adapt to emerging insolvency scenarios especially for MSMEs and complex cases.
IBC (Amendment) Act, 2019: Set a mandatory 330-day limit for resolution, including judicial delays.
Threshold for Homebuyers (2020): Minimum 100 or 10% of allottees required to initiate insolvency against real estate developers.
Pre-packaged Insolvency (2021): Introduced for MSMEs to allow quicker, debtor-led resolution processes.
Section 29A Clarification: Barred defaulting promoters from reclaiming their companies via backdoor bids.
Cross-Border Insolvency Proposal: Draft framework aligned with UNCITRAL Model Law, still under legislative consideration.
Summing Up
The Insolvency and Bankruptcy Code, 2016, is one of the most important changes in India's economic history. By making a unified and effective insolvency framework, it changed the way credit works, sped up recovery, and encouraged people to start their own businesses. The IBC is still changing and adapting, despite the difficulties it faces, particularly with regard to time resolution and tribunal capacity. With ongoing reforms and support from the courts, it is possible to make India's business environment healthier and stronger.
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History of Insolvency and Bankruptcy Code: FAQs
Q1. What is the Insolvency and Bankruptcy Code (IBC)?
The IBC is a comprehensive law introduced in 2016 to streamline insolvency and bankruptcy proceedings in India for individuals, companies, and partnerships.
Q2. Why was IBC introduced in India?
IBC was introduced to replace the existing fragmented laws, reduce delays in insolvency proceedings, and improve recovery rates for creditors.
Q3. Who governs the implementation of IBC?
The Insolvency and Bankruptcy Board of India (IBBI) is the regulatory authority that governs and oversees the implementation of IBC.
Q4. What are the key benefits of the IBC?
The IBC provides faster resolution, improves recovery for creditors, enhances investor confidence, and promotes a healthier credit culture.
Q5. What is the time limit for resolving insolvency under IBC?
The Corporate Insolvency Resolution Process (CIRP) must ideally be completed within 180 days, extendable up to a maximum of 330 days.
