NPA Crisis

Why India’s bankruptcy regime needs to be fixed?


From UPSC perspective, the following things are important :

Prelims level: IBC

Mains level: Reforms in the IBC

The government is proposing to make changes to India’s six-year-old Insolvency and Bankruptcy Code (IBC).

What is the Insolvency and Bankruptcy Code (IBC)?

  • The IBC, 2016 is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
  • It is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
  • The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

Key features

Insolvency Resolution: The Code outlines separate insolvency resolution processes for individuals, companies, and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals.

  1. For 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.
  2. For startups (other than partnership firms), small companies, and other companies (with assets less than Rs. 1 crore), the resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.

Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the RBI.

Insolvency professionals: The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.

Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies:

  1. National Company Law Tribunal: for Companies and Limited Liability Partnership firms; and
  2. Debt Recovery Tribunal: for individuals and partnerships

What are the changes being proposed?


  • Easier settlements: The process is being proposed to be divided into two phases—phase I will focus on finding potential buyers and handing over the management to the acquirer. Phase II would address the distribution of proceeds among creditors and settle inter-creditor disputes. This would make an effort to revive the units with better management, wherever possible.
  • Preventing delays: Average days taken to resolve a case has risen to 679 days in H1FY23 from 230 days in FY18. The changes presently under consideration seek to address inter-creditor disputes, which have been identified as the leading cause of delays.

Why is the IBC seen as a game-changer?

  • The IBC has proved to be a deterrent for many unscrupulous borrowers and imparted tools to banks to be reasonably confident about recovering NPAs.
  • Fear of losing control of the firm nudges debtors to settle their dues.
  • Till September 2022, 23,417 applications for initiation of the Corporate Insolvency Resolution Process (CIRP), with an underlying default amount of ₹7.31 trillion, were resolved before admission.
  • Indirectly, the code provides an exit route by winding up commercially unviable units.


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