Historical Evolution of the Insolvency and Bankruptcy Code (IBC): A Transformational Journey in Indian Insolvency Law

 

Introduction

The enactment of the Insolvency and Bankruptcy Code, 2016 marked a watershed moment in India’s economic and legal history. Before this unified legislation came into force, India struggled with a fragmented insolvency framework that was scattered across multiple laws, creating confusion, delays, and inefficiencies in resolving financial distress. The journey from the pre-IBC era to the present framework represents not merely a legislative change but a fundamental paradigm shift in how India approaches corporate insolvency, debt recovery, and business revival. This article examines the historical evolution of the IBC, the inadequacies of previous insolvency regimes, the legislative reforms that led to the Code’s enactment, and the landmark judicial interpretations that have shaped its implementation.

Pre-IBC Insolvency Regime: A Fragmented Landscape

Prior to the IBC, India’s insolvency and bankruptcy laws were dispersed across various statutes, each addressing specific aspects of financial distress but lacking coordination and uniformity. The primary legislations governing insolvency included the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and provisions within the Companies Act, 1956 and later the Companies Act, 2013.

The Sick Industrial Companies Act, 1985

The SICA represented one of the earliest attempts to create a specialized framework for addressing industrial sickness in India [1]. Enacted following the recommendations of the Tiwari Committee constituted in 1981, the Act established the Board for Industrial and Financial Reconstruction to determine whether companies were sick and to prescribe measures for their revival or closure. Under SICA, a company was deemed sick if it had been in existence for at least five years and its accumulated losses in any financial year equaled or exceeded its entire net worth.

The BIFR, which became functional in May 1987, along with the Appellate Authority for Industrial and Financial Reconstruction, formed a two-tier quasi-judicial structure designed to handle cases of industrial sickness. However, SICA suffered from fundamental deficiencies that severely limited its effectiveness. The Act applied exclusively to industrial companies, excluding service companies, trading entities, and other non-industrial businesses. This narrow jurisdictional scope became increasingly problematic as India’s economy evolved toward a service-oriented structure. Moreover, SICA adopted a balance sheet approach to detecting sick units rather than a prospective cash flow approach, which meant that by the time net worth erosion was detected, companies were often beyond revival.

The procedural inefficiencies under SICA were notorious. Cases before BIFR took an average of several years to resolve, with some proceedings dragging on for over a decade. The discretionary nature of BIFR’s decision-making created inconsistencies in outcomes for similarly situated companies. Additionally, Section 22 of SICA, which provided for an automatic stay on all proceedings against a company once a reference was made to BIFR, was frequently misused by companies seeking to evade their creditors rather than genuinely seeking revival [2].

Other Pre-IBC Legislation

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, established Debt Recovery Tribunals to provide a speedier mechanism for banks and financial institutions to recover their dues. However, the DRTs were plagued by their own problems, including inadequate infrastructure, understaffing, and mounting backlogs that defeated their purpose of providing expeditious recovery.

The SARFAESI Act, 2002, allowed secured creditors to enforce their security interests without court intervention. While this legislation had a positive initial impact, it had limited applicability and could not address cases involving multiple creditors with conflicting interests. The fragmentation across these various laws meant that there was no unified approach to insolvency resolution, leading to forum shopping, conflicting decisions, and prolonged uncertainty for all stakeholders.

Recognition of the Need for Reform

By 2014, India’s position in international rankings highlighted the urgent need for insolvency law reform. In the World Bank’s Ease of Doing Business Index, India ranked poorly on the “resolving insolvency” parameter. The increasing burden of non-performing assets in the banking sector, which threatened financial stability, made reform imperative. The existing framework was not only ineffective in reviving distressed businesses but also resulted in poor recovery rates for creditors, with average recovery taking over four years and recovery rates being among the lowest in the world.

Finance Minister Arun Jaitley, in his Budget Speech for 2015-16, identified bankruptcy law reform as a key priority for improving the ease of doing business in India. He announced that a modern bankruptcy code meeting global standards would be introduced [3]. This political commitment set the stage for comprehensive reform efforts.

The Bankruptcy Law Reforms Committee

On August 22, 2014, the Ministry of Finance constituted the Bankruptcy Law Reforms Committee under the chairmanship of Dr. T.K. Viswanathan, former Law Secretary and former Secretary General of Lok Sabha [4]. The Committee was tasked with examining the existing bankruptcy framework, identifying immediate policy and legal changes, and ultimately creating a uniform framework that would cover insolvency and bankruptcy of companies, limited liability entities, partnerships, and individuals.

The BLRC adopted a two-phase approach to its mandate. The first phase focused on examining whether policy and legal changes could yield immediate effects on insolvency under the Companies Act, 2013. This phase culminated in an Interim Report released in February 2015. The second phase involved creating a comprehensive, unified framework to replace the fragmented existing laws.

After extensive consultations with stakeholders, including banks, financial institutions, corporate entities, insolvency professionals, and legal experts, the BLRC submitted its final report to the Finance Minister on November 4, 2015. The report was presented in two volumes: Volume I contained the rationale and design of the proposed framework, while Volume II contained the draft Insolvency and Bankruptcy Bill. The Committee’s recommendations were based on several key principles, including maximizing the value of assets, promoting entrepreneurship, balancing the interests of all stakeholders, and establishing time-bound processes.

The BLRC recommended establishing a creditor-in-control model, departing from the debtor-in-possession approach that had characterized previous laws. This fundamental shift recognized that creditors, who bear the risk of non-payment, should have the primary say in determining the fate of a defaulting company. The Committee also emphasized the need for a specialized cadre of insolvency professionals and the creation of information utilities to maintain authenticated financial data.

Legislative Journey and Enactment

Following the submission of the BLRC report, a modified version of the draft bill incorporating public comments was introduced in the Sixteenth Lok Sabha by Finance Minister Arun Jaitley on December 23, 2015, as the Insolvency and Bankruptcy Code, 2015. The bill was then referred to a Joint Parliamentary Committee for detailed examination [5].

The JPC, after holding extensive consultations and receiving memoranda from various stakeholders, submitted its report on April 28, 2016. The report included a revised draft of the Bill incorporating several modifications based on the feedback received. The JPC’s recommendations aimed to strengthen certain provisions, clarify ambiguities, and ensure that the Code would be implementable and effective.

The revised Bill was passed by the Lok Sabha on May 5, 2016, and by the Rajya Sabha on May 11, 2016. Subsequently, it received Presidential assent from President Pranab Mukherjee and was notified in the Gazette of India on May 28, 2016, as the Insolvency and Bankruptcy Code, 2016 [6]. However, different provisions of the Code were brought into force in stages through various notifications. The provisions relating to corporate insolvency resolution for companies and limited liability partnerships were notified on December 1, 2016, marking the operational commencement of the Code’s most significant provisions.

Key Features and Institutional Framework of the IBC

The IBC introduced several revolutionary features that distinguished it from previous insolvency laws. The Code consolidated all insolvency and bankruptcy proceedings under a single legislative framework, making it applicable to companies, limited liability partnerships, partnership firms, and individuals. It established a time-bound Corporate Insolvency Resolution Process requiring completion within 180 days, extendable by a maximum of 90 days, thus imposing strict timelines to prevent indefinite delays.

The Code created a new institutional architecture consisting of four key pillars. The Insolvency and Bankruptcy Board of India was established as the regulatory authority to oversee the insolvency resolution process and regulate entities registered under it. The Board comprises representatives from the Ministries of Finance and Law, the Reserve Bank of India, and other experts.

Insolvency Professionals, a specialized cadre of licensed professionals, were introduced to manage the insolvency process and control the debtor’s assets during the resolution period. These professionals are required to register with Insolvency Professional Agencies, which in turn are regulated by IBBI. Information Utilities were envisaged to collect, collate, authenticate, and disseminate financial information, facilitating transparent and informed decision-making during insolvency proceedings.

The Code designated specific tribunals as adjudicating authorities: the National Company Law Tribunal for companies and limited liability partnerships, and the Debt Recovery Tribunals for individuals and partnerships. Appeals from NCLT lie to the National Company Law Appellate Tribunal.

A critical innovation of the IBC was the establishment of the Committee of Creditors, consisting of financial creditors with voting rights proportional to their debt. The CoC is empowered to make crucial decisions regarding the resolution plan, including whether to approve a plan or proceed to liquidation. This creditor-driven approach ensures that those with the most at stake make the key decisions.

Judicial Interpretation and Evolution of IBC

The implementation of the IBC has been significantly shaped by judicial interpretations, particularly by the Supreme Court of India. Two landmark judgments deserve special attention for their role in clarifying the Code’s operation and establishing its primacy in the Indian legal system.

Innoventive Industries Ltd. v. ICICI Bank (2017)

This case represented the first application under the IBC to reach the Supreme Court, making it a seminal judgment in the Code’s evolution. Innoventive Industries, facing financial difficulties due to labor problems, had defaulted on loans extended by ICICI Bank and other lenders. A Master Restructuring Agreement was executed, but the company continued to default. ICICI Bank filed an application under Section 7 of the IBC before the NCLT, seeking initiation of the Corporate Insolvency Resolution Process.

Innoventive Industries contended that under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958, its liabilities stood suspended for two years, and therefore no debt was legally due. Both the NCLT and NCLAT rejected this argument, holding that the IBC would prevail over the state legislation. Innoventive Industries appealed to the Supreme Court.

In its judgment dated August 31, 2017, the Supreme Court, speaking through Justice R.F. Nariman, noted that since this was the very first application moved under the Code, it was necessary to deliver a detailed judgment so that all courts and tribunals may take notice of a paradigm shift in the law [7]. The Court held that once an insolvency professional is appointed to manage a company, the erstwhile directors who are no longer in management cannot maintain an appeal on behalf of the company, as entrenched managements are no longer allowed to continue if they cannot pay their debts.

The Court examined the scheme of the IBC in detail, emphasizing its objectives of consolidating insolvency laws and providing a time-bound resolution process. It held that default is defined in very wide terms under Section 3(12) as non-payment of a debt once it becomes due and payable, including even part thereof or an installment amount. The Court clarified that it is of no consequence that a debt is disputed, so long as the debt is due and payable.

On the critical issue of repugnancy between the IBC and state legislation, the Supreme Court held that the non-obstante clause in Section 238 of the IBC gives it an overriding effect over all other laws. The Court conducted an extensive analysis of the constitutional doctrine of repugnancy under Article 254 of the Constitution and concluded that the IBC, being a later parliamentary enactment with an overriding non-obstante clause, would prevail over the limited non-obstante clause contained in the Maharashtra Act.

The Innoventive judgment established several foundational principles: the IBC represents a paradigm shift from debtor-in-possession to creditor-in-control; the Code prioritizes speed and adherence to timelines; the scope of inquiry at the admission stage is limited to verifying the existence of debt and default; and the IBC has overriding effect over other laws, including state legislation.

Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019)

The Essar Steel case represented one of the most complex and high-value insolvency proceedings under the IBC, involving admitted claims of over Rs. 49,000 crores. The case raised fundamental questions about the distribution of proceeds among different classes of creditors, the role and powers of the Committee of Creditors, and the extent of judicial review over commercial decisions.

ArcelorMittal’s resolution plan, approved by the CoC with a 92.24% majority, provided differential treatment to various classes of creditors. Senior secured financial creditors stood to recover approximately 85-90% of their claims, while operational creditors with claims exceeding Rs. 1 crore received minimal or nil recovery. The NCLAT had modified the plan to require equal treatment of all creditors, significantly altering the distribution pattern.

The Supreme Court, in its landmark judgment dated November 15, 2019, set aside the NCLAT’s modifications and upheld the resolution plan as approved by the Committee of Creditors [8]. The Court reaffirmed the primacy of the commercial wisdom of the CoC in determining the best resolution plan. It held that the CoC is required to assess the feasibility and viability of a resolution plan, taking into account all aspects including the manner of distribution of funds among various classes of creditors.

The Court rejected the argument that all creditors must be treated equally, clarifying that equitable treatment is to be accorded only to similarly placed creditors within the same class. Financial creditors and operational creditors occupy different positions in the Code’s scheme and need not receive the same treatment. Even within financial creditors, secured and unsecured creditors are treated differently. The Court held that protecting creditors from each other is an important objective of the Code, not just protecting creditors in general.

On the critical issue of the 330-day outer limit for completing the CIRP, which had been introduced through the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the Supreme Court struck down the word “mandatorily” as unconstitutional. The Court held that if delay is attributable to the tardy process of the Adjudicating Authority or NCLAT itself, it may be open for them to extend time beyond 330 days. This pragmatic approach recognized that companies should not be pushed into liquidation due to judicial delays beyond their control.

The Essar Steel judgment clarified several crucial aspects: the CoC’s commercial wisdom enjoys primacy and courts cannot second-guess business decisions; differential treatment of creditors is permissible and indeed contemplated by the Code; the resolution applicant acquires the business on a “fresh slate,” free from undecided claims; and while operational creditors must receive at least the liquidation value, no such floor exists for financial creditors.

Amendments and Continuing Evolution of IBC

Since its enactment, the IBC has been amended multiple times to address implementation challenges and close loopholes that emerged during its operation. The Insolvency and Bankruptcy Code (Amendment) Act, 2018, introduced Section 29A, which lists categories of persons ineligible to submit resolution plans. This provision was designed to prevent promoters who had defaulted on loans from regaining control of companies through related parties.

The Insolvency and Bankruptcy Code (Amendment) Act, 2019, introduced provisions relating to the minimum amounts payable to operational creditors and dissenting financial creditors, ensuring they receive at least the amount they would have received in liquidation. This amendment was upheld as constitutional by the Supreme Court in the Essar Steel judgment.

The COVID-19 pandemic necessitated further amendments. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, raised the minimum default threshold from Rs. 1 lakh to Rs. 1 crore and suspended fresh initiation of CIRP for defaults arising during the pandemic period. A Pre-Packaged Insolvency Resolution Process was introduced in 2021 specifically for micro, small, and medium enterprises, providing a debtor-in-possession framework that allows faster resolution with less disruption to business operations.

The Insolvency and Bankruptcy Board of India has also played an active role in the IBC evolution, issuing numerous regulations and circulars to operationalize various provisions and address practical challenges. As of 2024, IBBI has made over 80 amendments to 18 regulations made under the Code, demonstrating the dynamic nature of the insolvency framework.

Impact and Significance

The IBC has had a transformative impact on India’s credit culture and business environment. The creditor-in-control model has fundamentally altered the power dynamics between borrowers and lenders, incentivizing borrowers to honor their commitments to avoid losing control of their businesses. The Code has facilitated the resolution of several large corporate accounts, including high-profile cases involving major companies, resulting in significant recoveries for creditors.

According to data from the Insolvency and Bankruptcy Board of India, the Code has resulted in better outcomes than the pre-IBC regime. In cases where resolution plans have been approved, creditors have on average recovered approximately 166% of the liquidation value, indicating that CIRP has succeeded in preserving going concern value. The timebound nature of the process, despite some extensions, has significantly reduced the time taken for insolvency resolution compared to the previous regime.

The IBC has also had a deterrent effect, prompting many companies to settle their debts before or during the CIRP process to avoid loss of control. This behavioral change has improved credit discipline in the economy. However, challenges remain, including capacity constraints in NCLTs leading to delays, concerns about haircuts taken by creditors in resolution plans, and ongoing debates about the treatment of operational creditors and homebuyers.

Conclusion

The historical evolution of the Insolvency and Bankruptcy Code (IBC) represents a remarkable transformation in India’s approach to financial distress and corporate insolvency. From the fragmented and ineffective pre-IBC regime characterized by lengthy delays, poor recoveries, and debtor-friendly provisions, India has moved to a unified, time-bound, and creditor-driven framework that balances the interests of various stakeholders while prioritizing the revival of viable businesses.

The journey from the establishment of the Bankruptcy Law Reforms Committee in 2014 to the enactment of the Code in 2016 and its continuing evolution through amendments and judicial interpretations reflects a sustained commitment to creating a modern insolvency framework aligned with international best practices. The landmark judgments in Innoventive Industries and Essar Steel have provided crucial clarity on the Code’s operation and firmly established its primacy in India’s legal hierarchy.

While the IBC continues to evolve in response to emerging challenges and stakeholder feedback, it has already achieved significant success in changing India’s credit culture, improving the ease of doing business, and providing a robust mechanism for dealing with financial distress. The Code’s emphasis on time-bound resolution, professional management of insolvency proceedings, and creditor-driven decision-making represents a paradigm shift that has positioned India as having one of the most progressive insolvency frameworks globally. As the Code matures and stakeholders gain more experience in its implementation, it promises to continue playing a vital role in maintaining financial stability and promoting entrepreneurship in India’s dynamic economy.

References

[1] Ministry of Finance, Government of India. (2015). Report of the Bankruptcy Law Reforms Committee, Volume I: Rationale and Design. https://ibbi.gov.in/BLRCReportVol1_04112015.pdf 

[2] iPleaders. (2019). Insolvency: Before and after the Insolvency and Bankruptcy Code. https://blog.ipleaders.in/laws-on-insolvency-before-and-after-the-ibc/ 

[3] Press Information Bureau, Government of India. (2015). Bankruptcy Law Reforms Committee submits its Report. https://pib.gov.in/newsite/PrintRelease.aspx?relid=130200 

[4] Ministry of Finance. (2014). Constitution of Bankruptcy Law Reforms Committee. Office Order dated August 22, 2014. https://msme.gov.in/sites/default/files/Interim_Report_BLRC.pdf 

[5] Lok Sabha. (2016). Report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015. https://ibbi.gov.in/uploads/resources/16_Joint_Committee_on_Insolvency_and_Bankruptcy_Code_2015_1.pdf 

[6] The Gazette of India. (2016). The Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016). https://ibbi.gov.in/legal-framework/act 

[7] Innoventive Industries Ltd. v. ICICI Bank, Civil Appeal Nos. 8337-8338 of 2017, decided on August 31, 2017. https://ibbi.gov.in/webadmin/pdf/order/2017/Sep/31%20Aug%202017%20in%20the%20matter%20of%20Innoventive%20Industries%20Ltd.%20Vs.%20ICICI%20Bank%20&%20Anr.%20Civil%20Appeal%20Nos.8337-8338%20of%202017_2017-09-01%2009:56:52.pdf 

[8] Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, Civil Appeal Nos. 8766-8767 of 2019, decided on November 15, 2019. https://ibbi.gov.in/uploads/order/d46a64719856fa6a2805d731a0edaaa7.pdf 

[9] Cyril Amarchand Mangaldas. (2017). Innoventive Industries Limited v. ICICI Bank Limited: Paradigm Shift in Insolvency Law in India. https://corporate.cyrilamarchandblogs.com/2017/09/innoventive-industries-limited-v-icici-bank-limited-paradigm-shift-insolvency-law-india/ 

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