Impact of the Insolvency and Bankruptcy Code, 2016 on Corporate Debt Restructuring in India

Author: Venkata Saravana Kumar Bommaraju, Acharya Nagarjuna University

Abstract

The insolvency and bankruptcy enacted in 2016, revolutionized India's insolvency resolution framework by consolidating multiple laws and establishing a time-bound process for debt recovery. This article critically examines the impact of the ibc corporate debt restructuring, emphasizing its role in improving credit discipline, reducing non- performing assets, and enhancing investor confidence. It also evaluates the challenges of implementation, such as delays in resolution, capacity constraints in NCLTs, and issues surrounding haircuts and liquidation value. The study concludes by suggesting reforms to strengthen the ibc framework and ensure a more sustainable corporate debt ecosystem.

Keywords

Insolvency and bankruptcy code, NCLT, corporate debt restructuring , non- performing assets, financial creditors, liquidation.

Introduction

Insolvency bankruptcy code is the Indian enactment to help the companies restructure. If it fails to get restructured, it finally undergoes the liquidation. This mentioned the process and timeline for the companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For start ups (other than partnership firms), small companies and other companies (with assets less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days. In the 2019 amendment. In case of Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 these totally in favor of the creditors and and the sick industrial companies act 1985 it concerned to the reviving of the viable companies ignoring the invisible companies. The decisions taken under the 1985 act board of industrial and financial restructuring. As these acts are scattered in nature they are not pinnacle to both the debtors and creditors. This caused a hesitation in both parties. This concern has been remedied by the central government by enactment of the insolvency and bankruptcy code 2016 which caters the concerns of the creditors and debtors.

Apart from the companies, it also deals with the insolvency proceedings regarding registered partnership firms, limited liability partnership firms and individuals. Particularly, the company and limited liability partnership firms dealt with part II of the ibc act. The creditors have the option to opt either of the both based on their choice. Under the ibc, as compared to the remaining firms there is an increase in the company's performance post resolution. In ibc, contrary to other recovery acts, they have provided with the resolution process to financial creditors, operational creditors, and corporate debtors. The defaulted amount shall be not less than 1crore rupee. By Financial Creditor, Application to NCLT with Proof of default from Information Utility (like NeSL) Name of proposed Interim Resolution Professional (IRP). NCLT checks whether a default exists within 14 days. If satisfied NCLT admits the case. By Operational Creditor Sections 8,9 Serve a demand notice (10-day notice) to the corporate debtor. If no payment or dispute within 10 days, application shall be filed before NCLT. The company itself can file a petition if it cannot pay its debts. It must submit Books of accounts, List of creditors, Name of proposed IRP. interim resolution professionals take the control of entire books, accounts and functions of the company and later appoints the creditors on preferential basis. Creates the commit of creditors who will decide the continuation of the resolution professional. This entire process of the insolvency proceeding shall take place within the 330 days maximum and minimum 180 days section 12 of the act.

Evolution of Corporate Debt Restructuring Framework

Before IBC there was a system in India called Corporate Debt Restructuring (CDR). It is an out of court process to proceed for insolvency. A company's recovery without going to court is called “Out-of-Court Corporate Debt Restructuring.”Before 2001, when companies in India got into financial trouble,Banks had to go to court (which was very slow) besides the old laws like SICA and DRT were not working fast. So considering the difficulty faced by the financial institutions, the Reserve Bank of India (RBI) created a new CDR system to save companies that can be revived, instead of forcing them into bankruptcy. There are three levels in this system :

CDR Standing Forum
CDR Empowered Group (EG
CDR Cell

In the CDR standing forum, they decide general rules for how restructuring should happen. It's like a policy making body containing all banks and financial institutions. In the CDR Empowered Group (EG), decisions are taken on individual cases. CDR Cell, it collects the data, prepares plans, monitors progress. The CDR Standing Forum and the CDR Empowered Group are assisted by it. Though it is peripheral in nature, it is entrusted with the primary duty to undertake the initial scrutiny of the proposals received from borrowers/lenders, by calling for proposed rehabilitation plan and other information and put up the matter before the CDR Empowered Group, within one month to decide whether rehabilitation is prima facie feasible. Categories of debt restructuring. Category 1 is classified as "standard" or "sub-standard" by lenders. Mandatory for all creditors (both working capital and term lenders) to provide additional finance on a pro-rata basis as part of the restructuring package.Ensure collective support for viable but stressed accounts. Category 2 Accounts classified as "doubtful" by lenders. Not mandatory for creditors. Each creditor decides individually whether to provide additional finance. In this, restructuring focuses only on existing loans; promoters must arrange additional financing separately with new or existing creditors. Approval Threshold Requires 75% of creditors (by value) and 60% of creditors (by number) to approve the restructuring. Both categories follow the CDR mechanism’s core principles, except for the treatment of additional finance. Before providing finance, they come under two agreements, first Debtor–Creditor Agreement signed between the company and all banks containing a standstill clause which restrains the liquidation proceedings. Second, inter–Creditor Agreement in which there is a common consensus among all banks. If 75% of banks (by loan amount) and 60% (by number) agree to a plan, all others must follow it. After the final restructuring plan is approved, a letter of approval is issued concerning lenders which formalizes the restructuring package and triggers the next steps. From the date of issue, the lender has to formalize the package within 45days. It is reviewed frequently during the meetings by the standing committee of core group members banks. The timeline is 90 days from the date of LOA issuance. Regular reviews and a standing committee ensure that lenders adhere to the timeline and implement the package as approved. Exit Option Creditors not meeting the minimum threshold (75% by value and 60% by number) can exit the Corporate Debt Restructuring (CDR) if they do not wish to commit additional finance. Before they exit, they must arrange for their share of additional finance to be provided by a new or existing creditor, or Agree to defer the first year’s interest due after the CDR package becomes effective, payable along with the last principal installment without compounding. Lenders within the minimum 75% and 60% can also exit if the purchaser agrees to abide by the restructuring package approved by the Empowered Group. Existing lenders can maintain their existing exposure level if they tie up with existing or fresh lenders for additional finance. Exiting lenders can sell their existing shares to existing or fresh lenders at a mutually agreed price. New lenders rank equally with existing lenders for repayment and servicing of dues. SME Debt Restructuring Mechanism (2008). Applies to borrowers with total exposure ≤ ₹10 crore under multiple banks. Simpler and faster than CDR.

Resulting in

215 corporate cases approved.

Total debt restructured: ₹104,299 crore.

Sharp increase in cases after the 2008 global financial crisis.

By Dec 2008 → 208 cases (₹90,888 crore).

After 2008 → 56 new cases (₹27,666 crore) were added.

The main hindrance with this process is

lack of transparency.
Lead banks have been dominating the process.
The Stand-still clause covers only civil cases, not criminal actions.
The exit option exists only if other lenders agree to buy the loans.
Applies only to multi-lender accounts, not single-bank borrowers.

Later, the Joint Lenders’ Forum (JLF) was formed under the “Framework for Revitalizing Distressed Assets” (2014). It is introduced by the RBI to ensure early resolution of stressed assets and prevent NPAs. It is the group of Banks and financial institutions lending to a common borrower. Formed When an account (loan) of ₹100 crore or more is reported as SMA-2 (payment overdue for 60 days) to CRILC. Prepare a Corrective Action Plan (CAP) rectification, restructuring, or recovery. Work under the guidance of JLF Empowered Group (JLF-EG) for approving restructuring packages as that of cdr empowering committee. Its role is to collect and share data on loans of ₹50 crore and above to aid monitoring. Later in 2015 the reserve bank of India introduced the strategic debt restructuring mechanism to empower banks to convert part or full loan dues of a stressed borrower into equity shares, allowing them to acquire a majority ownership and change management when the borrower fails to revive the company. Applicable to all restructured loans under the Joint Lenders’ Forum (JLF) and Corporate Debt Restructuring (CDR) frameworks. Borrowers must provide prior shareholder authorization allowing lenders to convert debt into equity. the borrower fails to meet financial viability milestones or critical conditions after restructuring. JLF must review and decide within 30 days whether to invoke SDR. SDR decision: within 30 days of review.SDR package approval: within 90 days.Conversion completion within 90 days after approval.Banks collectively hold ≥ 51% equity. Banks should appoint professional management. Banks must divest their shareholding to a new promoter as soon as possible. Upon divestment, the account may be upgraded to “Standard” if performance improves.

SDR empowered banks to take over and revive failing companies. Despite the scheme providing a feasible solution for the corporate debtors and entities, it contains some hindering issues which leads to delay in the resolution process besides these schemes are not in the single enactment causing a conundrum to the initiators for opting a suitable process.

Insolvency and Bankruptcy Code (IBC), 2016

The Insolvency and Bankruptcy Code (IBC), 2016 is a landmark reform in India’s financial and legal architecture. Enacted to consolidate and amend fragmented insolvency laws, the Code brought India closer to global best practices in bankruptcy resolution.Prior to this, India had multiple overlapping laws — such as the RDDBFI Act, 1993, SARFAESI Act, 2002, SICA, 1985, and Companies Act, 1956 provisions — that failed to ensure timely debt recovery or restructuring. This fragmented system led to massive non-performing assets (NPAs) and reduced investor confidence.unified insolvency and bankruptcy laws for companies, LLPs, partnerships, and individuals, establishing a time-bound process for resolution. India’s Ease of Doing Business ranking improved significantly post-IBC implementation, reflecting enhanced credit discipline and faster insolvency resolution, promoting time-bound resolution to maximize the value of assets,Balancing interests of all stakeholders, including the alteration of priority in payment of government dues, formation of the Insolvency and Bankruptcy Board of India (IBBI) and related authorities.The Code is based on a four-pillar institutional structure:

Insolvency and Bankruptcy Board of India (IBBI)
Insolvency Professional Agencies (IPAs)
Insolvency Professionals (IPs)
Information Utilities (IUs)

Additionally, it specifies Adjudicating Authorities — National Company Law Tribunal (NCLT) for corporate insolvency and Debt Recovery Tribunal (DRT) for individual and partnership insolvency. It has the Insolvency and Bankruptcy Board of India (IBBI) regulates Insolvency Professionals,Insolvency Professional Agencies, andInformation Utilities.

Type of Entity	Adjudicating Authority	Appellate Authority
Corporate Persons (Companies, LLPs)	National Company Law Tribunal (NCLT)	National Company Law Appellate Tribunal (NCLAT)
Individuals & Partnership Firms	Debt Recovery Tribunal (DRT)	Debt Recovery Appellate Tribunal (DRAT)

Corporate Insolvency Resolution Process (CIRP) is a time-bound mechanism under the Insolvency and Bankruptcy Code, 2016 to resolve insolvency of companies. It can be initiated by a financial creditor (Sec.7), operational creditor (Sec.9), or the corporate debtor itself (Sec.10) upon default of ₹1 crore or more. Once admitted by NCLT, a moratorium is declared, and an Insolvency Professional takes over management. A Committee of Creditors (CoC) evaluates resolution plans within 180–330 days. If no plan is approved, the company goes into liquidation.

Financial creditors are those who lend money for time value (e.g., banks, NBFCs) and have voting rights in CoC. Operational creditors are those owed for goods, services, or wages; they have no voting rights and lower payment priority.

ibc and its impact on debt recovery: Structured and time-bound process: The IBC provides a strict timeline for resolution, typically 180 days which can be extended, to prevent cases from dragging on and to facilitate a faster resolution. It gives creditors more control by allowing them to initiate insolvency proceedings against a company in distress, which fosters accountability and encourages quicker resolution. to preserve and maximize the value of the company by keeping it as a "going concern" through a resolution plan rather than immediate liquidation. The resolution plan can include various measures such as debt reorganization, changes in management, or other business restructuring solutions. The IBC replaced a fragmented and often conflicting set of laws, creating a more streamlined and transparent system for resolving insolvency. Studies showed that banking health improved significantly. Gross NPA ratio fell to 2.6% in September 2024.Over 30,310 cases involving defaults worth ₹13.78 lakh crore were settled before admission to NCLT (till December 2024). The average overdue period fell drastically from 248–344 days to 30–87 days. 3% reduction in cost of debt for distressed firms post-IBC, showing a healthier credit environment.especially through increased presence of independent directors on boards of resolved companies.76% increase in average sales post-resolution. Job preservation and creation emerged as major but less recognized outcomes. IBC’s impact goes beyond creditor recoveries as it strengthened credit markets, improved ease of doing business, and boosted entrepreneurship and investments. While challenges such as delays and moderate recovery rates remain, the IBC’s structural foundation is strong.

Amendments

NCLT must admit insolvency applications within 14 days once default is proven.
Cases can be withdrawn only with 90% CoC approval, preventing misuse.
Corporate debtors can no longer nominate their own Interim Resolution Professional.
Faster implementation by separating business handover and distribution approval.
CIRP can be restored once (within 120 days) if approved by 66% CoC.
Fraudulent or preferential transactions can be examined even before admission. Creditors’ Committee to oversee the liquidation process for better control.
Must be completed within 180 days (extendable by 90 days).
Guarantors cannot recover payments from debtors during insolvency.
Introduced to handle multi-entity and international cases efficiently.

Conclusion

The Insolvency and Bankruptcy Code (IBC), 2016 has transformed India’s corporate debt restructuring landscape by creating a unified, time-bound, and transparent mechanism for resolving insolvency. It replaced fragmented and inefficient laws such as SICA, SARFAESI, and RDDBFI, thereby strengthening credit discipline and restoring investor confidence. The IBC empowered financial creditors, improved asset recovery, and reduced non-performing assets (NPAs) significantly, making the Indian banking system more resilient.

Compared to earlier frameworks like CDR, JLF, and SDR, the IBC provides greater clarity, accountability, and legal certainty through the involvement of NCLT and insolvency professionals. It not only facilitates faster resolution but also promotes business continuity, employment retention, and overall economic stability.

However, challenges persist in the form of procedural delays, overburdened NCLTs, and high haircuts in some cases. Continuous reforms—such as strengthening institutional capacity, ensuring timely resolutions, and enhancing stakeholder coordination—are necessary to achieve a more robust and sustainable insolvency ecosystem.

In essence, the IBC has been a landmark reform in modernizing India’s financial architecture, fostering creditor confidence, and positioning India closer to global standards in insolvency and debt restructuring.