In short :
The Insolvency and Bankruptcy Code (IBC), 2016 was introduced to reform India’s debt resolution system by shifting control from debtors to creditors and ensuring a time-bound resolution of corporate insolvency. It aimed to enhance credit discipline, reduce NPAs, and strengthen financial stability.
Why was IBC introduced (2016)?
- To consolidate multiple insolvency laws into a unified framework.
- To shift control from debtors to creditors during insolvency proceedings.
- To provide time-bound resolution (330 days limit) and curb delays in debt recovery.
- To improve India’s Ease of Doing Business ranking (India jumped to Rank 63 in 2020 from 142 in 2014).
- Part of a broader NPA resolution strategy post-2008 financial crisis.
Achievements So Far:
Recovery and Resolution Performance:
- ₹3.89 lakh crore recovered by creditors till 2024 (recovery rate: 32.8%).
- 93.41% of fair value recovered on average in resolution plans (IBBI data).
- 170% higher than liquidation value.
Improved Credit Culture:
- 30,310 cases settled pre-admission covering defaults worth ₹13.78 lakh crore.
- RBI and IIM-Bangalore studies show:
- Cost of debt for distressed firms fell by 3%.
- Borrowers are now more disciplined in repayments.
Behavioural Change & Pre-emptive Settlements:
- Borrowers now seek early resolution outside NCLT to avoid reputational and legal damage.
Corporate Governance Reform:
- Firms undergoing IBC show increased independent directors and better compliance.
Impact on NPAs:
- Gross NPAs of Scheduled Commercial Banks declined from 11.2% in 2018 to 2.8% in 2024 (RBI).
Key Challenges Affecting IBC’s Effectiveness:
Judicial Delays:
- NCLT backlogs and adjournments delay resolutions.
- Delays affect implementation of approved resolution plans, leading to asset erosion.
Post-resolution Uncertainty:
- Example: Bhushan Steel case — SC questioned a settled resolution, shaking investor confidence.
- Risk: Investors may hesitate to bid if resolution decisions can be overturned years later.
Low Recovery Rates for Some Sectors:
- Recovery rate average (~32.8%) is still low compared to global standards (Singapore ~70%).
Liquidation > Resolution:
- Of 6,000+ cases, over 2,700 ended in liquidation, especially MSMEs.
Lack of Capacity & Expertise:
- Shortage of NCLT judges, Resolution Professionals, and valuers hampers timely disposal.
Gaps in Framework:
Need for clearer norms for:
- Employee dues
- Intellectual property valuation
- Cross-border insolvency
- Group insolvencies
- MSME-specific processes
Bhushan Steel Verdict – Why Is It a Concern?
- SC reopened scrutiny into a case already resolved and implemented.
- Risk of undoing completed resolution plans = Legal and economic uncertainty.
- Undermines finality and sanctity of CoC decisions.
- Investors demand legal closure and judicial stability — core to IBC’s success.
CONCEPTS : INSOLVENCY, BANKRUPTCY & LIQUIDATION
NATIONAL COMPANY LAW TRIBUNAL (NCLT) :
About :
- Statutory Body: Constituted under the Companies Act, 2013.
- Established On: 1st June 2016.
- Origin: Based on recommendations of the Justice V. Balakrishna Eradi Committee.
Composition:
- Consists of a President, Judicial Members, and Technical Members.
- Appointments made by the Central Government.
Key Powers and Functions:
- Corporate Adjudicator: Adjudicates matters under the Companies Act (e.g., mergers, oppression, mismanagement, winding up).
- Insolvency Authority: Acts as the adjudicating authority for companies and LLPs under the Insolvency and Bankruptcy Code (IBC), 2016.
- Procedural Autonomy: Not bound by the Code of Civil Procedure (CPC); follows principles of natural justice.
- Enforcement Powers: Can enforce its orders like a civil court.
- Review Powers: Can review and rectify its own decisions.
- Regulatory Powers: Has authority to regulate its own procedures.
Way Forward:
Institutional Strengthening:
- Increase capacity of NCLTs and NCLATs.
- Ensure fast-track resolution under pre-packaged insolvency for MSMEs.
Codify Jurisprudence:
- SC must issue guiding principles to balance judicial review with commercial wisdom.
Clarify Post-resolution Liabilities:
- Need clearer laws on what happens after a resolution is approved and implemented.
Expand Coverage:
Formalise frameworks for:
- Cross-border insolvency
- Personal insolvency
- Tech start-up defaults and digital asset valuation
Strengthen IBBI Oversight:
- Improve monitoring of Resolution Professionals and ensure adherence to timelines.
| UPSC Relevance GS2 – Governance & Reforms:Strengthened institutional mechanisms (NCLT, IBBI), improved ease of doing business. GS3 – Economy:Major tool for NPA resolution; improved credit discipline; over ₹3.89 lakh crore recovered. Possible Mains Question : “The Insolvency and Bankruptcy Code (IBC), 2016 has been a game changer in India’s financial architecture, but challenges remain.” Critically evaluate. (250 words) |
