Towards a Fair, Efficient Insolvency Regime
Context: Evolution of Insolvency Models
- The Sick Industrial Companies Act (SICA) was enacted to revive financially distressed companies through a Board for Industrial and Financial Reconstruction.
- However, SICA’s debtor-in-possession model allowed promoters to remain in charge, leading to widespread misuse and delayed resolutions.
- The IBC was implemented to overcome these failures by shifting to a creditor-in-control model with time-bound resolution timelines.
- This tension is called the “Chakravyuha Challenge” — easy entry but difficult exit.
- The 2026 Amendment introduces CIIRP, a hybrid combining both models.
Advantages of the New Framework
- CIIRP (Sections 54C-54P) allows current management to retain control under a resolution specialist’s supervision.
- It avoids value-destroying disruption of typical liquidation proceedings for distressed companies.
- The amendment replaced “may” with “shall” in Section 7(5)(a), responding to the Vidarbha Industries ruling.
- This compels NCLT to admit cases based on information utility records, reducing judicial discretion.
- CIIRP offers a less disruptive restructuring instrument for companies facing transitory liquidity crises.
Shortcomings
- Initiation rights are restricted to “notified financial institutions” only, creating an arbitrary hierarchy.
- This sub-classification goes beyond the “intelligible differentia” standard upheld in Swiss Ribbons under Article 14.
- The government’s claim that notified institutions have special restructuring knowledge is outdated.
- Operational and smaller financial creditors are disenfranchised as they sit at the bottom of repayment priority.
- Non-notified creditors are forced into the more aggressive CIRP just to protect their interests.
- This compromises equity across the entire insolvency ecosystem.
- The restriction makes Inter-Creditor Agreements less clear and informal negotiations less fair.
- It risks deterring foreign investors who perceive the market as skewed against their asset classes.
Way Forward
- The US Chapter 11 and UK’s Part 26A base restructuring access on objective financial conditions, not creditor identity.
- India should adopt a “universal CIIRP” with a default-neutral initiation rule.
- This removes regulatory status and replaces it with a threshold based on financial exposure.
- Any financial creditor could initiate CIIRP with support from creditors holding at least 51% of total financial debt.
- This approach addresses constitutional concerns while protecting against one-sided, malicious filings.
Conclusion: The 2026 amendment rightly recognises that a pure creditor-in-control model does not preserve business value. However, the “notified institution” criteria risks undermining these gains. A universal CIIRP based on financial interest, rather than institutional identity, can make India’s insolvency system efficient, equitable and constitutionally sound for all stakeholders.
