Insolvency is a financial state in which an individual or a legal entity is unable to meet its debt obligations as they become due. It occurs either when the liabilities of an individual or a business exceed their assets, a situation referred to as balance-sheet insolvency, or when they are unable to pay debts as they become due in the ordinary course of business, which is called cash-flow insolvency.
This financial condition is an early signal of financial distress. Immediate steps must be taken to avoid a deeper crisis that may lead to formal bankruptcy proceedings. These steps can include generating additional cash flow, reducing overheads, minimizing personal or business expenditures, and renegotiating the terms of debt repayments with creditors.
The primary challenge of insolvency lies in its potential consequences. If it remains unaddressed, insolvency can escalate into legal bankruptcy or, in the case of companies, lead to liquidation. Thus, it is not merely a technical issue of accounting or liquidity, but a state that calls for strategic financial and legal planning to restore solvency.
The Nature of Bankruptcy
Bankruptcy refers to a formal legal declaration of the inability of an individual or a business to repay debts owed to creditors. It is a conclusion resulting from insolvency that has not been resolved. Bankruptcy is established through legal procedures and is generally initiated either by the insolvent party itself or by creditors.
There are three main avenues for initiating bankruptcy. First, the insolvent individual or entity may voluntarily file for bankruptcy by applying to the relevant court. Second, creditors who are owed unpaid debts may file a petition in court seeking a bankruptcy declaration against the debtor. Third, a legal entity may pass a special resolution and file it with the Registrar of Companies, thereby initiating bankruptcy proceedings.
Bankruptcy provides legal protection to the insolvent party from their creditors and facilitates a structured approach to settling outstanding debts, either through liquidation of assets or through other court-approved arrangements. In most jurisdictions, once the bankruptcy is concluded, the debtor is released from their dischargeable debts, allowing for a financial fresh start.
Relationship Between Insolvency and Bankruptcy
Insolvency is considered a financial condition, while bankruptcy is the legal outcome of that condition. Not every insolvent person or business ends up in bankruptcy. Many cases of insolvency are temporary and can be resolved through strategic interventions such as debt restructuring, cost-cutting measures, or capital infusion.
However, if these remedial measures fail or if the insolvent party is unable or unwilling to settle its debts, bankruptcy proceedings are often inevitable. Insolvency is thus a precursor, a signal of distress that may result in bankruptcy if unresolved. For individuals and non-corporate entities, unresolved insolvency typically leads to bankruptcy. For corporations, the equivalent process is liquidation.
It is important to understand that while all bankrupts are necessarily insolvent, not all insolvent entities become bankrupt. Insolvency is a broader concept, encompassing a range of financial difficulties, whereas bankruptcy is a definitive legal status.
What is Liquidation
Liquidation refers to the process of winding up a company or incorporated entity. It involves selling the company’s assets to pay off its debtsand eventually dissolving the business. This process can be voluntary or initiated by different stakeholders, including regulatory authorities, the company’s board of directors, shareholders, or unpaid creditors.
During liquidation, the legal existence of the corporate entity comes to an end. The assets are collected and distributed according to a priority list defined by law. Creditors are generally paid first, followed by shareholders, if any surplus remains. Once the distribution is complete, the company is formally struck off from the register of companies.
Liquidation is typically the final step in the corporate insolvency process. It is carried out when it becomes evident that the business cannot be revived or restructured. However, liquidation does not always indicate wrongdoing or mismanagement. Companies may choose liquidation as part of a strategic exit from an unprofitable or non-core business segment.
Differentiating Insolvency, Bankruptcy, and Liquidation
Understanding the distinctions among insolvency, bankruptcy, and liquidation is critical for interpreting financial distress and navigating legal remedies. Insolvency is a state of financial difficulty, often temporary and potentially reversible. Bankruptcy is a legal status, representing the formal declaration of inability to repay debts, nd is often seen as the result of unresolved insolvency for individuals or partnerships. Liquidation, on the other hand, is the process through which companies cease operations and their assets are sold to satisfy creditors.
Insolvency is common to both bankruptcy and liquidation. When a natural person becomes insolvent and is unable to meet their obligations, they may be declared bankrupt. When a corporate entity becomes insolvent and cannot be revived, it undergoes liquidation. This makes insolvency the shared starting point, while bankruptcy and liquidation are two possible outcomes, depending on the type of debtor involved.
This relationship is enshrined in legal frameworks like the Insolvency and Bankruptcy Code, 2016. The Code delineates how financial distress is treated for different kinds of entities and individuals. It provides structured processes and distinct outcomes based on whether the subject is a corporate debtor or an individual debtor.
Framework of the Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 201,6 is a comprehensive legislation that consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. It provides a time-bound process for resolving insolvency and aims to protect the interests of all stakeholders by ensuring the maximization of the value of assets.
The Code was designed to overhaul the existing framework that was seen as inadequate and fragmented. It introduced standard procedures, uniform regulations, and centralized adjudication mechanisms, making it a landmark reform in Indian financial legislation. The Code ensures that insolvency procedures are completed within a specified timeframe, thereby reducing litigation delays and increasing predictability.
Importantly, the Code separates the commercial aspects of insolvency resolution from judicial determination, placing the operational responsibility in the hands of professionals while confining the courts to matters of law. This structural reform has significantly improved the speed and efficiency of insolvency resolution in India.
Regulatory Mechanism under the Code
The regulatory framework of the Insolvency and Bankruptcy Code, 2016, is built on five key institutional pillars. These are the Insolvency and Bankruptcy Board of India, the Adjudicating Authority, Insolvency Professional Agencies, Insolvency Professionals, and Information Utilities.
The Insolvency and Bankruptcy Board of India acts as the apex regulatory body overseeing the functioning of insolvency professionals, agencies, and information utilities. It also frames regulations and ensures compliance across all stakeholders involved in the insolvency process.
Insolvency Professional Agencies are responsible for enrolling and regulating insolvency professionals. These agencies develop standards, enforce ethical conduct, and serve as a first level of accountability.
Insolvency Professionals play a critical role in the resolution process. They take control of the debtor’s assets and business, verify claims, form the creditors’ committee, and facilitate the decision-making process during the resolution. In case of liquidation, they act as liquidators or bankruptcy trustees.
Information Utilities are centralized repositories of financial information. They collect, store, authenticate, and disseminate data that is crucial for adjudication and the resolution of insolvency cases. This includes information on debts, defaults, and security interests.
The Adjudicating Authority for corporate persons is the National Company Law Tribunal. For individuals and partnership firms, the adjudicating authority is the Debt Recovery Tribunal. These bodies pass orders in insolvency and liquidation proceedings and hear appeals from creditors and debtors alike.
Applicability and Scope of the Code
The Insolvency and Bankruptcy Code, 2016, applies to companies incorporated under the Companies Act, 2013, or any previous company law, limited liability partnerships, and other body corporates as notified by the central government. It also covers individuals and partnership firms, including personal guarantors to corporate debtors.
The Code does not extend to financial service providers such as banks, insurance companies, and mutual funds, as these are governed by their respective regulators. However, non-banking financial companies with a specified asset size are included under the Code through separate rules and notifications issued in consultation with the Reserve Bank of India.
The Code distinguishes between different types of debtors and prescribes different resolution mechanisms. For example, the insolvency resolution process for corporate persons is detailed in Part II of the Code, while Part III deals with individuals and partnership firms. This separation ensures that each category of debtor receives a tailored and effective resolution framework.
Corporate Insolvency Resolution Process
The corporate insolvency resolution process is a structured mechanism provided under the Insolvency and Bankruptcy Code, 201,6 for resolving the financial distress of corporate debtors. It provides a time-bound opportunity to evaluate the viability of a distressed business and to formulate a plan for its revival or, if revival is not possible, to initiate liquidation. This process is triggered when the corporate debtor defaults on a payment of one lakh rupees or more, although the central government has the power to notify a higher amount, not exceeding one crore rupees.
Once an application for insolvency resolution is admitted by the adjudicating authority, a moratorium is declared, and an interim resolution professional is appointed. This professional takes over the management of the company and begins the process of identifying and verifying claims of creditors. A committee of creditors is then formed, composed primarily of financial creditors, which plays a central role in deciding the future course of the corporate debtor.
The resolution process must be completed within 180 days from the insolvency commencement date, with a possible extension of 90 days. During this period, the resolution professional manages the operations of the corporate debtor as a going concern, to preserve asset value and encourage viable resolution plans from potential investors or buyers.
Role of the Committee of Creditors
The committee of creditors is a crucial body under the corporate insolvency resolution process. It comprises financial creditors who are empowered to make key decisions regarding the resolution of the corporate debtor. Their primary responsibility is to evaluate and approve a resolution plan that outlines how the debtor’s obligations will be addressed.
The committee must approve the resolution plan by a minimum voting threshold, as prescribed by the Code. Once approved, the plan is submitted to the adjudicating authority for confirmation. If the plan is approved by the tribunal, it becomes binding on all stakeholders, including the corporate debtor, its employees, creditors, and shareholders.
If the committee of creditors concludes that the business is unviable or fails to receive a viable resolution plan within the specified time frame, it may decide to initiate liquidation. This decision is also subject to approval by the adjudicating authority. The overarching purpose of this committee is to ensure a collective, fair, and transparent resolution process that maximizes value and reduces litigation.
Liquidation Process for Corporate Debtors
If the insolvency resolution process fails or no resolution plan is approved within the prescribed period, the corporate debtor proceeds to liquidation. The adjudicating authority passes an order to this effect, and the resolution professional becomes the liquidator unless replaced by the tribunal.
The liquidator is responsible for managing the entire process, which includes taking custody of the debtor’s assets, inviting claims from creditors, verifying those claims, and creating a liquidation estate. The assets of the debtor are then sold, and the proceeds are distributed according to the priority list specified in the Code.
The priority of payments during liquidation is strictly defined. It begins with the insolvency resolution process costs and liquidation expenses, followed by secured creditors and workmen’s dues, then unsecured financial creditors, government dues, and finally shareholders or partners of the corporate debtor. Once the process is complete, the liquidator applies for dissolution of the corporate debtor, which is ordered by the adjudicating authority.
Fast Track Insolvency Resolution Process
To address the needs of smaller corporate debtors, the Code also provides for a fast-track insolvency resolution process. This process applies to companies with assets and income below a certain threshold or those categorized as startups or small companies under the Companies Act.
The fast-track process must be completed within ninety days from the insolvency commencement date, with a possible extension of forty-five days. The steps are similar to the regular corporate insolvency resolution process but are designed to be faster and less complex. This provision aims to reduce costs, avoid prolonged litigation, and facilitate quicker decisions for small businesses in financial distress.
Voluntary Liquidation of Corporate Persons
The Code allows companies to initiate voluntary liquidation if they are solvent and wish to wind up operations. This process is initiated by passing a resolution by the shareholders or partners of the company. A declaration of solvency must be made, confirming that the company can pay its debts in full within a specified period.
A liquidator is then appointed to carry out the voluntary liquidation. The liquidator takes charge of the assets, settles outstanding liabilities, and distributes any remaining assets to shareholders. Once all obligations are met, an application is made to the adjudicating authority for the dissolution of the company. The voluntary liquidation process ensures that solvent companies can exit the market in an orderly and legally compliant manner.
Adjudicating Authorities under the Code
The Code designates specific adjudicating authorities to oversee insolvency and bankruptcy proceedings. For corporate debtors, including companies and limited liability partnerships, the National Company Law Tribunal acts as the adjudicating authority. Any appeal against the decision of the tribunal can be made to the National Company Law Appellate Tribunal, and subsequently, to the Supreme Court of India.
For individuals and partnership firms, the Debt Recovery Tribunal serves as the adjudicating authority. Appeals against its orders go to the Debt Recovery Appellate Tribunal and finally to the Supreme Court. These adjudicating authorities play a critical role in approving resolution plans, ordering liquidation, resolving disputes, and ensuring that due process is followed.
Offences and Penalties
The Code prescribes stringent penalties for fraudulent conduct during the insolvency or liquidation process. These include penalties for concealing property, defrauding creditors, falsifying documents, or providing false information. The objective of these provisions is to deter misconduct, ensure transparency, and protect the interests of creditors and other stakeholders.
Offences are dealt with under specific sections in the Code and may result in imprisonment, fines, or both. These provisions ensure that the insolvency process remains fair and that stakeholders act in good faith throughout the proceedings.
Scope and Applicability of Part II of the Code
Part II of the Code applies to companies and limited liability partnerships when the amount of default is at least one lakh rupees. However, the central government has the power to notify a higher threshold of default, not exceeding one crore rupees, especially in the context of pre-packaged insolvency resolution processes introduced later.
This part of the Code includes detailed provisions for initiating insolvency, forming a committee of creditors, approving resolution plans, and, if necessary, proceeding with liquidation. It also covers voluntary liquidation and fast-track resolution processes, providing a comprehensive legal framework for corporate insolvency.
Pre-Packaged Insolvency Resolution Process
The Code introduced a pre-packaged insolvency resolution process as an alternative mechanism to resolve distress, particularly for micro, small, and medium enterprises. In this process, the resolution is initiated by the corporate debtor with the prior consent of financial creditors. A base resolution plan is submitted by the debtor, which may be approved or substituted with better offers from other applicants.
This mechanism is designed to be more efficient, less adversarial, and faster than the traditional corporate insolvency resolution process. It balances the debtor-in-possession model with creditor-in-control features, ensuring transparency and minimizing disruption to business operations.
The pre-packaged process is governed by separate rules and regulations but remains subject to the adjudicating authority’s oversight. It retains all essential elements of creditor participation, information utilities, and resolution professional guidance.
Bankruptcy of Individuals and Partnership Firms
Part III of the Code deals with insolvency resolution and bankruptcy for individuals and partnership firms. This part is applicable in cases where the debtor is unable to pay debts and requires legal intervention to either restructure the liabilities or declare bankruptcy.
The process begins with an application by either the debtor or the creditor. The adjudicating authority, which is the Debt Recovery Tribunal, appoints a resolution professional to assist in preparing a repayment plan. This plan must be approved by a committee of creditors and confirmed by the tribunal.
If a repayment plan cannot be finalized or is to implemented, the creditor or debtor can file for bankruptcy. Once bankruptcy is declared, the resolution professional acts as the bankruptcy trustee, takes over the estate of the bankrupt, liquidates the assets, and distributes the proceeds to creditors. After completion, the debtor may receive a discharge order and be released from further liabilities.
Flow of Insolvency Process for Individuals
The insolvency resolution process for individuals follows a structured path under the Code. Once the application is admitted, the adjudicating authority appoints a resolution professional to oversee the proceedings. The debtor and creditors work together to draft a repayment plan, which must be approved by the committee of creditors.
If the plan is approved and implemented successfully, the debtor receives a discharge from remaining obligations. If not, bankruptcy proceedings begin. The bankruptcy trustee takes control of the debtor’s assets, sells them to satisfy creditors, and the debtor receives a final discharge order at the end of the process. This discharge is recorded by the Insolvency and Bankruptcy Board of India in a public register.
The framework ensures that individuals facing genuine financial difficulties are allowed to restructure their liabilities or receive legal relief from unmanageable debt burdens. It also provides creditors with a transparent and fair mechanism to recover dues.
Liquidation under the IBC
Liquidation refers to the process of bringing a business to an end and distributing its assets to claimants. It occurs when a company is insolvent, meaning it cannot pay its obligations as and when they fall due. Under the Insolvency and Bankruptcy Code (IBC), liquidation is the last resort, undertaken only after attempts at resolution have failed. The main aim is to realize the value of the assets and repay creditors in a specific order of priority. When the Adjudicating Authority, i.e., the National Company Law Tribunal (NCLT), determines that a resolution plan cannot be approved within the stipulated time, or the committee of creditors (CoC) decides not to pursue a resolution plan, the corporate debtor moves into liquidation. The process is conducted by a liquidator, appointed by the NCLT, who is responsible for taking custody of the assets, evaluating and realizing them, and distributing proceeds to creditors and stakeholders.
Circumstances Leading to Liquidation
Liquidation may arise in the following scenarios under IBC: (a) Failure to submit a resolution plan within the time permitted (180 days, extendable by 90 days); (b) Rejection of all resolution plans submitted by the resolution applicants; (c) Decision by CoC with a 66% voting share to liquidate the company even before a resolution plan is finalized; (d) Failure of an approved resolution plan during implementation and subsequent direction by the NCLT to initiate liquidation. These provisions emphasize that liquidation is not a default option but a fallback when all attempts at restructuring have failed.
Role and Duties of a Liquidator
The liquidator acts as an officer of the NCLT and is vested with wide powers under the IBC to carry out the process in a time-bound and transparent manner. The liquidator’s responsibilities include: verifying claims of all creditors, taking control and custody of the corporate debtor’s assets, evaluating and selling the assets, and distributing the sale proceeds according to the statutory priority. The liquidator may also initiate or defend legal proceedings on behalf of the corporate debtor. Additionally, the liquidator prepares and submits progress reports and the final report to the NCLT, providing an account of the entire liquidation process. The objective is to maximize the value of the assets and ensure equitable treatment of all stakeholders.
Order of Priority in Liquidation
The IBC prescribes a specific waterfall mechanism under Section 53 to distribute the proceeds from the liquidation of assets. This order is as follows: (1) Insolvency resolution process costs and liquidation costs; (2) Secured creditors who relinquish their security interest and workmen’s dues for the preceding 24 months (pari passu); (3) Wages and unpaid dues to employees (other than workmen) for the preceding 12 months; (4) Financial debts owed to unsecured creditors; (5) Government dues and any unpaid secured creditors (who have not relinquished their security interest); (6) Any remaining debts and dues; (7) Preference shareholders; (8) Equity shareholders or partners. This hierarchy ensures that the most critical stakeholders, such as employees and operational creditors, are protected to a reasonable extent and that the process follows a fair and consistent structure.
Liquidation Estate and Distribution
The assets of the corporate debtor that are considered part of the liquidation estate include all tangible and intangible properties, whether or not in the possession of the debtor, excluding assets held in trust or otherwise protected from liquidation. The liquidator consolidates these assets to create the liquidation estate. The liquidator is then required to value the assets, sell them via public auction or private sale, and apply the proceeds to repay creditors in the prescribed order. Distribution must be completed within one year from the liquidation commencement date. Any surplus remaining after full settlement of claims is returned to shareholders according to their rights. The idea is to recover maximum value through transparent and fair procedures while ensuring closure of the corporate debtor’s affairs.
Avoidance Transactions in Liquidation
To prevent misuse of the insolvency process, the IBC allows the resolution professional or liquidator to challenge and reverse certain transactions entered into before the insolvency commencement date. These include preferential transactions (where a creditor receives undue advantage over others), undervalued transactions (assets sold or given away below market value), and extortionate credit transactions (unfair or usurious loans). The lookback period varies depending on whether the transaction was with a related party or an unrelated party. If the NCLT finds any such transaction to be avoidable, it can reverse the effect and restore the position as if the transaction had not occurred. This serves as a deterrent against fraudulent behavior and ensures that all creditors are treated equitably.
Voluntary Liquidation
Apart from liquidation initiated due to insolvency, the IBC also provides for voluntary liquidation of solvent companies. If a company has no debts or is capable of paying its debts in full, and the shareholders decide to cease operations, they can initiate voluntary liquidation. The process involves a declaration of solvency by the majority of directors, followed by approval from shareholders through a special resolution. A liquidator is then appointed to carry out the process. Voluntary liquidation offers a structured and time-bound exit strategy for companies seeking to wind down their operations legally and efficiently.
Comparison Between Insolvency, Bankruptcy, and Liquidation
Although the terms insolvency, bankruptcy, and liquidation are often used interchangeably, they refer to distinct concepts. Insolvency is a financial condition where a person or entity is unable to pay debts as they fall due. Bankruptcy is a legal status that applies to individuals declared as insolvent by a competent authority and subjected to a resolution process under law. Liquidation is the process of winding up the operations and distributing the assets of a company. The key differences lie in the scope, application, and consequences. Insolvency is a condition; bankruptcy is a legal declaration; liquidation is a procedure. Insolvency can lead to either resolution or liquidation. Bankruptcy is only applicable to individuals and partnership firms under the IBC, while liquidation is specific to corporate persons.
Liquidation Timeline and Closure
Under the IBC, the liquidator is expected to complete the liquidation process within one year from the liquidation commencement date. However, this period can be extended by the NCLT based on a valid reason. During this period, the liquidator must verify claims, realize assets, and distribute the proceeds. Once the process is complete, the liquidator files a final report with the NCLT. If satisfied, the NCLT passes an order for dissolution of the corporate debtor, and the name is struck off from the register maintained by the Registrar of Companies (RoC). The closure of liquidation marks the end of the legal existence of the corporate entity.
Impact on Stakeholders
Liquidation has wide-ranging implications for stakeholders. For creditors, particularly secured and financial creditors, it offers an opportunity to recover dues, though often at a reduced value compared to a resolution plan. Employees and operational creditors may face losses, as they are ranked lower in the distribution hierarchy. Shareholders typically receive nothing unless there is a surplus after all debts are settled. Promoters lose control of the company and may face disqualification from managing other companies. For the economy, effective liquidation ensures that unviable businesses are weeded out, assets are redeployed, and economic value is preserved to the extent possible. However, the social costs in terms of job losses and loss of business continuity must also be managed through appropriate policy support.
IBC, 2016 – Important Provisions
The IBC, 2016, consolidates various laws relating to insolvency and bankruptcy and provides a comprehensive framework for the resolution of insolvency of corporate persons, partnership firms, and individuals in a time-bound manner. It lays down provisions for the following: Insolvency Resolution Process for Companies and LLPs; Insolvency Resolution Process for Individuals and Partnership Firms; Liquidation of Companies and LLPs; Bankruptcy of Individuals and Partnership Firms; Fast Track Insolvency Resolution Process; Voluntary Liquidation; Fresh Start Process.
Corporate Insolvency Resolution Process (CIRP)
The process begins with the filing of an application by a financial creditor, operational creditor, or the corporate debtor itself, with the Adjudicating Authority (National Company Law Tribunal or NCLT). Once the application is admitted, a moratorium is declared, and an Interim Resolution Professional (IRP) is appointed to take over the management of the corporate debtor. The IRP invites claims from creditors and constitutes the Committee of Creditors (CoC). The CoC evaluates the resolution plans submitted by prospective resolution applicants. If a resolution plan is approved by the CoC and the NCLT, the corporate debtor continues its operations under the new management. If no plan is approved within the prescribed time frame (180 days, extendable up to 330 days), the company proceeds with liquidation.
Liquidation Process
Liquidation is initiated if the CIRP fails or if the NCLT rejects the resolution plan. The liquidator is appointed to take control of the assets of the debtor and realize the value of the assets. The proceeds from the sale of assets are distributed as per the waterfall mechanism laid down in the IBC, 2016. This includes payment in the following order: Insolvency resolution process costs and liquidation costs; Secured creditors and workmen dues; Employee dues; Unsecured financial creditors; Government dues; Other creditors; and Shareholders, if anything remains.
Individual Insolvency and Bankruptcy
For individuals and partnership firms, the IBC provides for insolvency resolution through the Fresh Start Process, Insolvency Resolution Process, and Bankruptcy Process. The Adjudicating Authority for individuals and firms is the Debt Recovery Tribunal (DRT). The fresh start process is for debtors whose gross annual income does not exceed a certain threshold and who have assets and debts within specified limits. The Insolvency Resolution Process can be initiated by the debtor or creditor. If the resolution process fails, the bankruptcy process begins with the appointment of a bankruptcy trustee who takes control and possession of the property of the debtor, administers the estate, and distributes it among creditors.
Time-Bound Resolution
One of the most significant features of the IBC is the time-bound process for resolution. The law mandates completion of CIRP within 180 days, which may be extended up to 330 days, including litigation periods. This helps prevent undue delays that were prevalent under previous legislation and improves the ease of doing business in India.
Role of Insolvency Professionals and Adjudicating Authorities
The IBC created a new cadre of professionals known as Insolvency Professionals (IPs) who manage the resolution process, take control of the debtor’s assets, and manage the affairs of the debtor during the CIRP. They are regulated by the Insolvency and Bankruptcy Board of India (IBBI), the key regulatory body established under the IBC. The adjudicating authorities under the IBC are the National Company Law Tribunal (NCLT) for corporates and the Debt Recovery Tribunal (DRT) for individuals and partnerships. Appeals from NCLT go to the National Company Law Appellate Tribunal (NCLAT), and further to the Supreme Court.
IBC and Its Impact on the Economy and Business
Since its enactment, IBC has significantly improved the insolvency resolution ecosystem in India. It has empowered creditors, particularly financial institutions, to recover dues effectively. Many high-profile resolutions have been completed under the IBC, helping banks recover substantial amounts from stressed assets. It has instilled financial discipline among borrowers and helped improve credit culture. The fear of losing control of a company to an insolvency professional has made promoters more proactive in resolving defaults. It has also increased confidence among investors and contributed to India’s improvement in global rankings for ease of doing business.
Challenges and Way Forward
Despite its successes, the IBC faces several challenges. There have been delays due to overburdened NCLTs, legal hurdles, and complex litigation. Sometimes, resolution plans offer deep haircuts to creditors, raising concerns. There is a need for further strengthening of institutions, increasing the number of benches of NCLT, and ensuring quicker appointments of IPs and adjudicators. The government has been proactive in making amendments to the IBC to plug loopholes and improve efficiency. However, a constant review mechanism is needed to make it more effective.
Conclusion
Insolvency, bankruptcy, and liquidation are critical financial and legal concepts that play a key role in addressing financial distress. The IBC, 2016, has brought clarity and structure to these concepts in the Indian legal framework. By introducing a time-bound and creditor-driven process, it has transformed the way insolvencies are handled in the country. While challenges remain, the IBC represents a significant step towards a more robust and efficient financial system.