Changes to insolvency rules welcome, but complex cases may overwhelm system

While many of the proposed amendments to the IBC, such as cross-border and group insolvency, will make the resolution process smoother, certain issues such as limited judicial capacity could weaken

The nine-year-old Insolvency and Bankruptcy Law has already undergone six rounds of amendments since its inception 2016, but none have been so wide-ranging and corrective in action as those proposed in the Bill tabled in the recently-concluded monsoon session of Parliament. Unlike its initial years, when ordinances changed the Insolvency and Bankruptcy Code’s (IBC) key provisions overnight, the latest round of proposed changes have come after deliberations lasting three years.

 

While bringing in enabling provisions for cross-border and group insolvency had been long-pending reforms, experts have called the introduction of creditor-led insolvency among the big ticket reforms proposed in the 80-page Bill.

 

The last amendment to IBC in 2021 had introduced the Pre-packaged Insolvency Resolution Process for corporate MSMEs, but it has not found many takers yet.

 

The proposal allowing creditor-led initiation of insolvency proceedings, experts say, will give teeth to creditors to actually start discussing and taking effective resolution steps as soon as they detect financial stress in borrowers.

 

“Of course, the real test of this will be how the delegated legislations are formulated – transparent procedures with commercial autonomy should prove beneficial for the ecosystem," said Soumitra Majumdar, partner, JSA Advocates & Solicitors, adding "It is also important for the regulators to duly regard and protect decision making by the creditors, so long as procedures have been duly followed, and not disincentivise commercial decision making by bankers, with the fear of post facto regulatory scrutiny.”

 

Addressing delays  

 

One of the biggest criticisms of the IBC in its current avatar has been the delay in resolutions, which leads to steep erosion in the value of assets and the subsequent chances of a company continuing as a going concern. Under the current IBC framework, an application initiating corporate insolvency resolution must be admitted within 14 days. In reality, however, the average time taken by adjudicating authorities is over 434 days, or almost 14.5 months.

 

Under the new set of changes, mandatory admission of an insolvency application filed by a financial creditor if default is established and procedural requirements are met seeks to address this issue. The Amendment further clarifies that when an application is filed by a financial institution, the records of default from Information Utilities (IU) shall be considered sufficient evidence to ascertain the existence of such default.

 

“Such an amendment was necessary to eliminate judicial discretion at the admission stage, which has historically caused delays. It will also enable the financial creditors to gain stronger enforcement tools as the threshold for initiating CIRP (Corporate Insolvency Resolution Process) will be strictly objective and diminish the scope for corporate debtors to stall proceedings on frivolous or extraneous grounds,” said Yogendra Aldak, executive partner at Lakshmikumaran and Sridharan Attorneys.

 

IBC experts, however, point out that the Bill still does not provide a strict enforcement mechanism for completing the CIRP within the mandated 330 days. Some were also hoping for a fast-track process for real estate insolvencies where homebuyers continue to face project delays and uncertain legal remedies.

 

Providing legal clarity

 

Over the last few years, several court orders had created several interpretational issues and uncertainty about the IBC which the Bill attempts to tackle through various amendments.

 

“A few proposed amendments to the IBC in the current version of the Bill appear to unscramble the current scrambled situation as it now seeks to legislate a few "judge-made law" interpretations,” said Diwakar Maheshwari, dispute resolution partner at Khaitan & Co.

 

The Supreme Court ruling in State Tax Officer vs Rainbow Papers, for instance, had created uncertainty and confusion by recognising statutory dues like GST or VAT as secured debtors and placing governmental claims ahead of financial creditors in the waterfall payment structure. The Bill has proposed to restore the priority to secured creditors over governmental dues by clarifying that 'security interest' only arises from contractual agreements — not by operation of law.

 

Taking off from the SC ruling which interpreted that applicants need to take the approval of the Competition Commission of India before the CoC approves the plan, the proposed amendments have clarified that CCI’s approval be taken before the plan is submitted to the adjudicating authority. The move has brought much needed clarity for resolution applicants  who have started lining up with proposals at the antitrust regulator even before winning the bid, which means the CCI must deal with the additional workload.  

 

The amendments have also taken away certain protections such as moratorium for personal guarantors. The amendments, IBC experts say, provide for mechanisms to synchronise insolvency resolutions of a borrower with that of its guarantors, so that creditors can get the benefit of the underlying credit and asset pool. However, some feel this has its own flip side. “It erodes the purpose of resolution introduced for personal guarantors, which will lead to large scale bankruptcy proceedings,” Vijay K Singh, senior partner at S&A Law Offices.

 

Issues that still need revisiting

 

Even with this set of reforms, there remain issues that the Bill has not been able to address. Legal experts say that several persistent issues lie outside the reach of the Amendment, such as conflicts between the IBC and other laws. There remains uncertainty when anti-money-laundering or tax authorities attach assets of companies in insolvency.

 

“Contentious provisions like the strict eligibility criteria for bidders (Section 29A) still lack clarity in their application to the new processes. Operational creditors continue to feel sidelined, as the reforms did little to improve their position in recoveries,” said Singh.

 

Besides, experts say that the capacity constraints at the National Company Law Tribunals (NCLTs) which face heavy backlogs and understaffing have not been addressed. In absence of a clear plan or expanding judicial capacity or restructuring the process, even improved laws could be weakened by practical delays, as complex or high-volume cases continue to overwhelm the system, IBC practitioners said.

 

Singh said that without addressing these structural and enforcement gaps, the 2025 amendment may end up expediting only the simplest insolvency cases, while more complex cases remain stuck in the old problems.