The Insolvency and Bankruptcy Code: At Risk of Drifting from Its Core Principles?

The promise of the Insolvency and Bankruptcy Code (IBC), enacted in 2016, was its radical overhaul of India’s insolvency ecosystem—time-bound resolution, creditor-driven processes, and maximization of asset value. However, recent trends suggest that the execution of the IBC is faltering, exposing structural inefficiencies that threaten its foundational goals. This is not merely about delays; it reflects deeper institutional and policy-level tensions that have hamstrung its efficacy.

The Institutional Landscape: IBC’s Original Mandate

The IBC was born out of the failures of fragmented statutory frameworks such as SICA, RDDBFI, and SARFAESI, which struggled with sluggish debt resolution and mounting NPAs. What set IBC apart was its ambitious framework—chiefly, time-bound resolution of insolvency cases (180/330 days), a creditor-in-control model, and institutional bodies such as the National Company Law Tribunal (NCLT) and Insolvency and Bankruptcy Board of India (IBBI) tasked with ensuring transparency and uniformity.

Yet today, the very features that made IBC transformative are in jeopardy. Cases are routinely languishing well beyond their stipulated timelines—717 days is alarmingly common—and recovery rates have stagnated at a meagre 31-32%, far from the maximization of asset value the framework initially envisaged. NCLT, envisioned as a lynchpin adjudicatory body, suffers from crippling vacancies despite being operational for nearly a decade.

The Case for Urgency: Evidence of Erosion

Data provides a stark warning. Between FY23 and FY25, corporate insolvency resolution cases initiated under the IBC dropped nearly 43%, from 1,262 cases to 723. Institutional inefficiencies—including NCLT’s backlog owing to understaffing—undermine the program’s ability to provide speedy resolutions. Vacancies across key adjudicatory posts have persistently dragged cases forward, contributing to declining confidence in creditors using the IBC process.

Further, judicial interventions have often altered established compromises, creating regulatory unpredictability. The Supreme Court’s rulings in Essar Steel and Jaypee Infratech reshaped settlement hierarchies but have also reopened resolved cases, anathema to the "time-bound resolution" ideal. This inconsistency risks transforming creditor priorities towards non-IBC solutions such as stressed asset securitization.

Institutional Critique: NCLT’s Achilles’ Heel

The National Company Law Tribunal (NCLT), a judicial centerpiece of the IBC, exemplifies the friction between vision and execution. Designed based on recommendations from the Eradi Committee in 1999, its structure is ill-equipped to handle modern insolvency case volumes. Despite recent ministerial efforts to fill vacant posts, overburdened benches remain the norm, leading to damaging delays in insolvency adjudications.

Meanwhile, the Insolvency and Bankruptcy Board of India (IBBI) faces criticism for insufficient oversight on resolution professionals and inconsistent guidelines on valuation methodology. Systemic delays originating from both judicial and procedural bottlenecks undermine the IBBI’s credibility as a regulator ensuring asset value maximization.

Counter-Narrative: Is Judicial Oversight a Necessary Evil?

The argument often put forth in defense of judicial interventions is that they safeguard constitutional and stakeholder rights by preventing creditor overreach. For example, in the Essar Steel case, the Supreme Court intervened to uphold equal treatment of operational creditors, emphasizing fairness instead of expediency. Proponents argue that unchecked creditor-driven models may favor financial institutions at the expense of smaller stakeholders.

While judicial oversight does ensure adherence to legal principles and accountability, it is critical for courts to balance this intervention against the IBC mandate for “speedy resolution.” Delays in enforcement erode creditor discipline—the very backbone of the IBC’s credibility.

The International Perspective: Lessons from Germany’s Insolvency System

Germany’s insolvency framework, anchored in the Insolvenzordnung Act, offers interesting lessons. Unlike India’s creditor-in-control model, Germany emphasizes administrator-driven processes with strict deadlines that seldom exceed one year. The German courts are heavily insulated from reopening settled insolvency cases, ensuring finality and predictability. Recovery rates in Germany average over 40% and serve as a benchmark for India’s underwhelming 31-32% performance.

What India heralds as creditor discipline, Germany secures through institutional rigor instead of frequent judicial intervention. The comparative lesson underscores India’s need to institutionalize mechanisms that avoid case reopenings without compromising fairness.

Assessment: A Necessary Recalibration

The IBC’s strength lies in its principles of speed, creditor empowerment, and value maximization—but its execution needs urgent recalibration. Institutional reforms, such as overhauling NCLT’s staffing models and streamlining judicial involvement, are non-negotiable if India aspires to retain investor confidence and make its insolvency ecosystem truly functional.

Long-term solutions could include pre-packaged insolvency frameworks for small- and mid-sized cases, mandatory adherence to NCLT timelines enforced via financial penalties, and clearer delineation of appellate intervention thresholds to reduce unpredictability.

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