SC’s Flags Gaps in Bankruptcy Resolution Process | 09 May 2025

Source: BS 

Why in News?  

The Supreme Court (SC) of India, invoking Article 142, struck down a resolution plan under the Insolvency and Bankruptcy Code (IBC), 2016 and ordered liquidation of the debt-ridden company instead.  

• This highlights growing concerns over the consistency and effectiveness of the IBC in achieving timely and constructive resolutions. 

What are the Key Issues Flagged by the Supreme Court in Bankruptcy Resolution? 

• Non-Conformity with Statutory Provisions: The resolution plan approved in the Bhushan Power & Steel Ltd. case did not conform to Section 30(2) of the IBC, which mandates that resolution plans must be in the best interests of creditors and meet statutory requirements. 
• Lapses by the Resolution Professional: The resolution professionals (RPs) failed to perform due diligence and allowed a flawed resolution plan to proceed, highlighting concerns over competence, accountability, and regulatory oversight of RPs in the insolvency process. 
• Weaknesses in the Committee of Creditors (Coc): The CoC, responsible for assessing the plan, did not exercise due diligence and commercial wisdom, approving a plan that ultimately harmed the interests of creditors. 
  • COC spearheads the Corporate Insolvency Resolution Process (CIRP), under the Insolvency and Bankruptcy Code (IBC) 2016. 
• Judicial Oversight Gaps: The National Company Law Tribunal’s failure to reject the flawed resolution plan under Section 31(2) of the IBC exposed gaps in judicial oversight, underscoring the need for stronger tribunal-level scrutiny to uphold the IBC’s integrity. 

What is Insolvency and Bankruptcy Code (IBC), 2016? 

• About:  The IBC, 2016 is India’s comprehensive bankruptcy law that consolidates and streamlines existing insolvency frameworks for companies, partnership firms, and individuals. 
  • Insolvency refers to a situation where liabilities exceed assets, and debts cannot be paid as they fall due. Bankruptcy is the legal declaration of such inability to pay debts. 
  • The T.K. Vishwanathan Committee (Bankruptcy Law Reforms Committee) 2015 recommended a unified framework for resolving corporate and personal insolvencies, which led to the enactment of the Insolvency and Bankruptcy Code (IBC), 2016. 
    • The IBC establishes a time-bound, creditor-driven process for resolving insolvency, aiming to improve credit discipline, resolve stressed assets efficiently, and strengthen the overall business environment.  
    • It was primarily introduced to address the bad loan crisis in India’s banking sector. 
  • Regulating Authority: The Insolvency and Bankruptcy Board of India (IBBI), a statutory body established under the IBC, 2016, is responsible for formulating rules and regulations for insolvency resolution in India.  
    • It comprises members from the Ministry of Finance, Ministry of Corporate Affairs, and the Reserve Bank of India. 
  • Adjudicating Authority: In the IBC, the Adjudicating Authority for corporate persons is the National Company Law Tribunal (NCLT), while for individuals and firms, it's the Debt Recovery Tribunal (DRT).  
    • The NCLT handles cases involving corporate debtors and their guarantors, while the DRT deals with insolvency matters of individuals and partnership firms other than Limited Liability Partnerships. 
  • Corporate Insolvency Resolution Process: It is a time-bound legal mechanism under the IBC, 2016, designed to resolve the financial distress of companies that default on debt repayment.  
    • It can be initiated by financial creditors, operational creditors, or the defaulting company itself by filing an application with the NCLT which appoints an Interim Resolution Professional (IRP) who takes control of the company's management.  
      • The IRP verifies creditor claims and forms a CoC, which evaluates and votes on a resolution plan within 180 to 330 days. 
    • The Adjudicating Authority may order liquidation if no resolution plan is filed within 180 days (or the extended period) from the insolvency commencement date. 
• Key Achievements: Since its inception, the IBC has facilitated the resolution of over Rs 3.16 lakh crore of debt in 808 cases, contributing to better recovery rates compared to older mechanisms such as the DRT and Lok Adalat. 
  • The IBC was described as a "lighthouse of a new era", promoting credit discipline and contributing significantly to the historic reduction of non-performing assets (NPAs). 
    • As per the RBI’s report, Net NPAs were at a 12-year low of 0.6% in June 2024, showcasing the IBC's effectiveness in improving credit discipline. 
  • The IBC contributed significantly to India’s improved rank in the World Bank's Doing Business Report (DBR), with India rising from 142nd in 2014 to 63rd in 2019, before the report's discontinuation. 

What are the Key Issues Related to IBC?

• Delay in Resolution Process: One of the key issues with IBC is the delay in completing insolvency resolutions. 
  • While the IBC aims for a 180-day timeline, frequent extensions and delays in the process have led to asset devaluation, creditor losses, and overall inefficiency in resolving cases.  
  • This undermines the core purpose of the Code—quick and effective resolution. 
• Imbalance in the CoC: The CoC, which plays a crucial role in approving resolution plans, is heavily dominated by financial creditors (banks and financial institutions). 
  • This often leaves operational creditors (suppliers, employees) underrepresented, leading to biased resolutions in some cases that may not account for the needs of smaller creditors or result in an unfair distribution of assets. 
• Lack of Legal Certainty in Cross-Border Insolvency: The IBC framework lacks a comprehensive approach to cross-border insolvency, causing challenges in the resolution of multinational companies with operations or assets in multiple countries. 
  • The absence of clear legal frameworks and coordination mechanisms with other countries can result in jurisdictional conflicts, prolonged litigation, and asset mismanagement. 
• Inadequate Protection of Debtors’ Interests: While IBC prioritizes the recovery of debts, it often places excessive emphasis on creditor interests at the expense of the debtor’s right to rehabilitation. 
  • The insolvency process tends to push for liquidation rather than restructuring, particularly in cases of distressed businesses that could still be viable with the right support. 
• Inefficiency in Liquidation Process: The liquidation process under the IBC has been marred by inefficiencies such as poor asset valuation, lack of transparency, and delays in the sale of assets. This results in lower recoveries for creditors and market distortion.

What Measures Can be Adopted to Strengthen the IBC? 

• Timely Resolution and Swift Judicial Action: The legal framework for IBC should prioritize speed and efficiency. Timely judicial intervention will prevent prolonged legal disputes and economic uncertainty. 
  • Strengthening the IBC’s institutional framework, including improving the capacity of the NCLT, will ensure smoother operations and maintain confidence in the insolvency resolution system. 
• Robust Oversight with Targeted Penalties: The IBC must be supported by robust institutional mechanisms for oversight, particularly to prevent malpractices during the resolution process. 
  • Any illegalities uncovered after the resolution plan has been implemented should result in targeted penalties for those responsible. 
• Balanced Approach to Debtor and Creditor Interests: Reassess the code to provide a more balanced approach that ensures the interests of corporate debtors (especially in cases of distressed businesses) are fairly protected without compromising creditor rights.  
  • A redefined "commercially viable" solution would encourage more sustainable resolutions. 
• Enhanced Digitalisation of IBC Procedure: Promote digitalisation to connect all IBC stakeholders, ensuring transparency, reducing data gaps, and speeding up decisions.  
  • Expand the Pre-Packaged Insolvency Resolution Process (PPIRP) to large corporations to prevent value erosion from delays. 
• Customizing IBC for Emerging Sectors: Amend IBC provisions to address the specific challenges faced by emerging sectors like fintech, digital businesses, and green industries, providing them with sector-specific insolvency solutions.

Conclusion

The Supreme Court’s intervention highlights critical gaps in the IBC process. Despite its success in improving debt recovery, persistent delays, weak oversight, and imbalance in stakeholder interests hinder its effectiveness. Strengthening institutional capacity, ensuring timely resolutions, and adopting a more balanced and sector-specific approach are key to restoring the IBC’s credibility.