Authors: Abhinav Akash, DSNLU

Mrunalini Srinivasan, Sastra University

Riya Sharma, FIMT

Editor: Anoushka Chauhan, NALSAR


The legal and economic environment of any country always plays a vital role in the development of a country, especially during the crisis time of Covid-19. The ‘Insolvency and Bankruptcy Code, 2016’ is considered the biggest economic reform next to GST. It is a landmark legislation consolidating the regulatory framework governing the restricting and liquidation of persons.

The process of insolvency and liquidation used to be in the hands of shareholders of the company or entities and thus, by the time the process ended, the assets left for distribution after liquidation were very low. This however, was changed with the implementation of the IBC, which has brought in a shift of power from shareholders to the creditor, making a positive impact on the economy. But more work needs to be done in this regard as the Foreign Exchange Management Act, 1999 (FEMA) has not yet been amended and synced with these regulations which may not serve the purpose of IBC or could lengthen the process[1]

This article analyzes the impact that the Insolvency and Bankruptcy Code has had on which parties, and whether the influence of it should be viewed in a positive light or not.


Before the Insolvency and Bankruptcy Code (hereinafter, “the Code”) was introduced, insolvency proceedings were initiated under several different acts, the rights, remedies and procedures of which faced variations. This multiplicity of statutes left the process fragmented. The primary issues with these was a lack of uniformity in the recourse granted for different parties, and the significant amount of time the process itself would consume. In fact, the average time taken in India for insolvency resolution was nearly 4.3 years, compared to the 1 and 1.5 years taken in the UK and US respectively. Often, by the time that the insolvency resolution proceedings had culminated, most assets would have eroded, with little left for distribution amongst creditors and little left for bidders to bite on. These assets could only be required with a steep haircut - leaving those who had credited and invested in outrage.

The process of insolvency resolution was radically changed with the introduction of the Code. Having potential to critically impact every aspect of doing business in India, it has been thoroughly scrutinized by jurists and investors alike. It consolidated all insolvency laws to provide a more effective way to resolve insolvency.

The Code has affected the business scenario of India in several ways. Firstly, there has been a substantial shift in power itself - earlier, creditors held the right to seek recourse with a minimum threshold amount of just Rs 1 lakh, it spelled that promoters and business holders could no longer operate according to their whims. The Central Government holds the right to increase the threshold amount to a maximum of Rs. 1 crore, a right that they have recently exercised[2]. Under the IBC, financial creditors[3], operational creditors[4], can file for initiating the corporate insolvency resolution process. The procedure for the resolution of insolvency is clearly defined in the Code, starting from initiation to liquidation.

The ease and structural uniformity of the process has indeed made India a legible place for investment[5]. The risk of investing has significantly decreased, and has also given space for foreign investors to employ a flexible exit strategy. Notwithstanding the insolvency resolution process, the Code seeks to maximize the value of its assets, which proves an attraction for investors[6]. Later amendments[7] have even secured and consolidated the rights of unsecured buyers such as ‘real estate allottees’ or homebuyers, which is only a betterment for potential investors. Furthermore, these developments have created a favorable environment for the mergers and acquisitions industry to boom[8].

The National Company Law Tribunal[9] (“NCLT”), established under the Companies Act, 2013, is recognized as the adjudicating authority for the Code, along with the Debt Recovery Tribunal (“DRT”). The NCLT works on the lines of any other Court of Law in the country, presiding over insolvency cases of all corporate persons under the Code. Eliminating any and all bias in its hearing of facts and pronouncement of orders, it has served as an effective adjudicating body since its advent, having recovered Rs. 80,000 crores of unrecovered debt in 2018 alone[10].

As much as the success of the Code and the much-warranted but previously direly lacking simplicity that it has ushered in to the country, its shortcomings must also be taken into account when analyzing the Code.

Firstly, there are certain tricky grey areas involved when it comes to foreign investors, such as the conflicting juxtaposition posed with the Foreign Exchange Management Act, 1999, which has not yet been amended to sync with the Code[11]. Furthermore, it is unclear as to why the Code seems to pose a hierarchized order of priority in which assets are distributed during liquidation. After liquidation, secured creditors receive their entire outstanding amount instead of just the collateral value, unsecured creditors are prioritized over trade creditors, and government dues are to be repaid after the unsecured creditors. There is no explanation delving into the rationale behind this prioritization.

Certain procedural aspects also pose a problem, such as the multiplicity of Insolvency Professional Agencies, which regulate the Insolvency Professionals. While the Code itself is silent on the rationale, multiple IPAs can promote and boost competition. However, the multiple IPAs can also lead to a conflict of interest of the regulatory and competitive goals for the IPAs[12].

[1]Hiten Kotak, Insolvency and Bankruptcy Code: What’s all the noise about?, Forbes India (1 Oct. 2018). [2] See, Section 4(1), Insolvency and Bankruptcy Code, 2016. [3] See, Section 5(7), Insolvency and Bankruptcy Code, 2016. [4] See, Section 5(20), Insolvency and Bankruptcy Code, 2016. [5] Ajay Singla, IBC and its Impact on Indian Economy, MyStory (10 January, 2020). [6] Ibid. [7] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. [8] Meenakshi Awasthi, Insolvency and Bankruptcy Code (IBC) - Boon or Bane?, S.B. Jain & Associates’ Blog (5 January 2019). [9] See, Section 408,Companies Act, 2013. [10] Kumar Rahul, NCLT helps recover Rs. 80,000 in 2018 from IBC cases, Livemint (25 December 2018). [11] Hiten Kotak, Insolvency and Bankruptcy Code: What’s all the noise about?, Forbes India (1 Oct. 2018). [12] Arvind Gayam, The Insolvency and Bankruptcy Code: All you need to know, The PRS Blog (10 May 2016).

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