Insolvency and Bankruptcy Code (IBC): Strengthening Resolution, Recovery and Creditor Rights

Context

A recent National Company Law Tribunal (NCLT) order in the Subhash Chandra case has raised concerns over deep haircuts, asset valuation, related-party creditors, claim verification and the integrity of the Committee of Creditors (CoC) under the Insolvency and Bankruptcy Code (IBC), 2016. The approved plan offered ₹6.25 crore against claims of ₹22,006.57 crore, plus ₹25 lakh towards process costs.

About IBC

1. The IBC, 2016 is a unified, time-bound legal framework in India designed to resolve insolvency and bankruptcy for corporates, partnerships, and individuals through resolution or liquidation.
2. Administered mainly through the Ministry of Corporate Affairs.
3. Regulator: The Insolvency and Bankruptcy Board of India (IBBI) oversees insolvency proceedings and professionals.
4. Adjudicating Bodies: The National Company Law Tribunal (NCLT) handles companies and LLPs and appeals go to National Company Law Appellate Tribunal (NCLAT), while the Debt Recovery Tribunal (DRT) manages individuals and partnership firms and appeals go to Debt Recovery Appellate Tribunal (DRAT).
5. Process Shift: It moves control from a “debtor-in-possession” to a “creditor-in-control” model via the Committee of Creditors (CoC).
6. Its core objectives include:

• • Time-bound resolution of insolvency.
  • Maximisation of asset value.
  • Protection of interests of creditors and other stakeholders.
  • Revival of viable businesses and efficient exit of non-viable firms.
  • Strengthening credit discipline.

Corporate Insolvency Resolution Process (CIRP)

1. Initiation: Insolvency proceedings can begin after a default of at least ₹1 crore by a financial creditor, operational creditor or the corporate debtor
2. Time-Bound Process: The CIRP is generally completed within 180 days, with extensions subject to a maximum overall limit of 330 days.
3. Moratorium: A temporary legal freeze is imposed on recovery actions and other proceedings against the debtor during the insolvency process.

1. After a default, eligible creditors can approach the NCLT to initiate CIRP.
2. An Interim Resolution Professional/Resolution Professional (RP) takes control of the process and manages the corporate debtor as a going concern.
3. A Committee of Creditors (CoC), mainly comprising financial creditors, evaluates resolution options.
4. At least two registered valuers assess the debtor’s assets.
5. They estimate:

• • Fair Value: Likely value of assets under normal market conditions.
  • Liquidation Value: Expected amount if assets are sold during liquidation.
  • Enterprise Value: Economic worth of the business as a continuing enterprise.

1. Potential buyers submit resolution plans, which are evaluated and voted upon by the CoC before final approval by the NCLT.
2. A resolution plan requires approval by at least 66% vote by value of CoC. If resolution fails, the company may move towards liquidation.

Haircut and the Recovery Debate

1. A haircut broadly means the portion of a creditor’s claim that is not recovered through a resolution plan. It is not defined in the IBC.
2. A high haircut does not always mean a high economic loss, as admitted claims may include accumulated interest, old liabilities and guarantees with reduced value.
3. However, the Standing Committee on Finance has raised concerns over haircuts as high as 95%, especially when delays reduce asset value.
4. Hence, IBC performance should be assessed through recovery, liquidation value and fair value, along with the revival of viable businesses.

Performance and Significance of IBC

1. Creditor Control: IBC shifted India from a debtor-in-possession to creditor-in-control model and strengthened credit discipline.
2. Resolution: By March 2026, 8,987 CIRPs were admitted and 1,419 companies were resolved through approved plans.
3. Recovery: Creditors recovered about ₹4.32 lakh crore, amounting to 116.85% of liquidation value and 94.56% of fair value.
4. Bank Recovery: In FY2024-25, IBC accounted for ₹54,528 crore (52.4%) of recoveries by Scheduled Commercial Banks through major recovery mechanisms.
5. Overall Impact: IBC should be assessed through recovery, value preservation, business revival and credit discipline, rather than haircuts alone.

Valuation and Governance Challenges

1. Asset Identification: Incomplete identification of assets can lead to undervaluation of stressed companies.
2. Valuation Differences: Lack of uniform and sector-specific standards can result in significant differences between valuation reports.
3. Liquidation Value: Excessive reliance on liquidation value may undervalue businesses that can survive as going concerns.
4. Enterprise Value: Better assessment of enterprise value can help distinguish between temporarily stressed and genuinely unviable businesses.
5. Related-Party Influence: Related or associate creditors may affect CoC voting, raising concerns about fairness and transparency.
6. Resolution Delays: Judicial and procedural delays can further reduce the value of stressed assets and weaken recovery.

Recent Reforms

1. IBC Amendment Act, 2026: Aims to reduce procedural delays, strengthen creditor oversight and improve clarity in insolvency proceedings.
2. Stronger CoC Role: Gives the Committee of Creditors (CoC) greater involvement in key liquidation decisions.
3. Faster Processes: Seeks to streamline claim verification and liquidation and provide clearer timelines.
4. CIIRP: Introduces Creditor-Initiated Insolvency Resolution Process for certain financial institutions.
5. Valuation Standards: IBBI has strengthened valuation standards to promote greater consistency and transparency.

Subhash Chandra Case: Key Issues

1. Voting Dispute: The plan secured 80.814% votes, while opposing banks held 19.186%; banks questioned the eligibility of some related/associate creditors.
2. Claim Verification: NCLT flagged deficiencies in 1,260 individual claims due to inadequate documentary verification.
3. Artificial Liabilities: The tribunal also examined certain related-party claims and guarantees amid allegations of artificially created liabilities.
4. Broader Concern: The case highlights the need for genuine claims, reliable valuation and transparent CoC voting.

Way Forward

1. Improve Valuation: Adopt uniform, sector-specific valuation standards and give due importance to enterprise/going-concern value.
2. Strengthen Claim Verification: Ensure rigorous scrutiny of claims, related-party creditors and guarantees to prevent artificial liabilities.
3. Ensure Professional Accountability: Strengthen oversight of Resolution Professionals, valuers and auditors for greater transparency.
4. Speed Up Resolution: Enhance NCLT and IBC capacity to reduce delays and prevent further erosion of stressed assets.
5. Protect CoC Integrity: Ensure transparent creditor voting and effective safeguards against conflicts of interest and related-party influence.

Conclusion

A strong IBC framework can improve credit discipline, protect creditor rights and preserve viable businesses. Faster resolution, reliable valuation and transparent processes will strengthen India’s financial system, investment climate and economic growth.

IBC vs SARFAESI

UPSC-Oriented FAQs

Q1. What is the primary objective of the IBC?
Ans. IBC aims at time-bound insolvency resolution, asset-value maximisation and revival of viable businesses, while protecting creditor interests.

Q2. How does IBC differ from SARFAESI?
Ans. SARFAESI mainly focuses on debt recovery, while IBC follows a collective resolution approach aimed at business revival and value preservation.

Q3. What do “debtor-in-possession” and “creditor-in-control” mean?
Ans. Under debtor-in-possession, the existing promoters/management continue to run the business despite financial distress. Under creditor-in-control, control shifts to the Resolution Professional, while the CoC takes key decisions on the company’s resolution.

Q4. Why are high haircuts a concern under IBC?
Ans. Very high haircuts may indicate low creditor recovery, especially when caused by delays, weak valuation or questionable claims. However, recovery should also be compared with fair and liquidation value.