"A bankruptcy proceeding is not a death sentence but a chance for a fresh start." -- Elizabeth Warren

In India, Bankruptcy and Insolvency since a long time have been critical issues in the financial sector, which impacts businesses, creditors, and the overall economy. Insolvency refers to as a situation where a debtor which may be an individual or company is unable to repay their outstanding debts i.e. a situation where debtor's assets are not sufficient to pay off their liabilities.

Bankruptcy, on the other hand, is a legal declaration of insolvency i.e. when a court has determined that a company or individual is unable to pay off their debts and in return this declaration starts a legal process to resolve the insolvency of the individual or company and protect the rights of the creditors to the insolvent individual or company. Both of these concepts are important in the financial ecosystem because they help in resolving financial crisis while maintaining economic stability.

Before the introduction of The Insolvency and Bankruptcy Code, 2016, India's insolvency framework in the financial sector was scattered across various laws, which made the resolution process of insolvency ponderous and counterproductive. Companies that financial trouble had to deal with laws such as the Sick Industrial Companies Act (SICA) of 1985, which tried to help struggling companies but often fell short.

Other laws aimed at debt recovery, such as the Recovery of Debts Due to Banks and Financial Institutions Act of 1993 and the SARFAESI Act of 2002, led to long legal battles for the companies or individual and also poor asset recovery. Realizing the issues created by these scattered laws, the Lok Sabha passed The Insolvency and Bankruptcy Code in December 2015, which was later enacted in December 2016. This newly introduced code aimed to create a unified and faster insolvency process, helping companies and individuals to retain their asset's value and protect the interests of the stakeholders and also the creditors.

The Insolvency and Bankruptcy Code (IBC) of 2016 has helped transforming India's insolvency procedures by combining various existing laws into one simple framework. The IBC required cases to be resolved within 180 days, with a possible 90-day extension, so that the value of the assets could be preserved and the interests of the creditors could be protected too. This was a major improvement over the previous system where cases dragged on for years. The IBC 2016 emphasise interests of the creditors. Banks and also the other financial creditors can initiate insolvency proceedings against defaulters.

Once the process starts, a Committee of Creditors (CoC) is formed which comprises these creditors. They determine the resolution plans needing a 66% majority for decisions. This ensures that those with significant financial stakes guide the process, hence balancing the interests of both creditors and debtors, leading to fair negotiations and effective restructuring plans. IBC also prioritize recovery of the businesses/companies with fair chances of thriving over liquidation of these businesses/companies.

It has also introduced pre-packaged insolvency resolutions for Micro, Small, and Medium Enterprises (MSMEs), which allows the current management to stay if they have a feasible plan with them. This approach helps to reduce legal costs and smoothens the process of resolutions for smaller businesses.

History and Evolution

The history of the bankruptcy laws in India dates back to pre-independence British era where insolvency regulations were primarily influenced by the English laws. The evolution journey started on 12th March, 1909 when The Presidency-Towns Insolvency Act was enacted and enforced on 1st January, 1910. Before independence the Britishers had divided India into different presidency towns for better and efficient administration.

This law was specifically applied to Bombay, Madras, and Calcutta. Then on 25th February,1920 came The Provincial Insolvency Act,1920 which was used to govern the insolvency proceedings in rest of the India being ruled by the British. These laws primarily used to deal with individual insolvency and were not designed to restructure the insolvent corporates. After independence in 1947, The Parliament of India enacted The Companies Act 1956 on 1St April,1956 which enabled the companies to be formed by the process of registration and also govern the corporate insolvency.

It did provide liquidation provisions but lacked a robust resolution mechanism, which often led to prolonged delays and ineffective recoveries. Further in the line came The Sick Industrial Companies (Special Provision) Act, 1985 enacted on 8 January 1986 which aimed to detect financially struggling companies and help reviving financially distressed companies. This law also established Board for Industrial and Financial Reconstruction (BIFR), which was aimed at rehabilitating sick companies rather than liquidating them.

However, BIFR became ineffective, as companies started exploiting the loopholes in it to delay the proceedings, which lead to further financial deterioration. And now to address the issue of non-performing assets (NPAs) in the banking sector, the Recovery of Debts Due to Banks and Financial Institutions Act,1993 (RDDBFI Act) enacted on 27 August 1993, which created Debt Recovery Tribunals (DRTs).

Although this helped in loan recovery, but it did not offer a comprehensive insolvency resolution framework. Later, on 17th December 2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002 (SARFAESI Act) was introduced to give powers to the banks and other financial institutions to seize and sell the assets of the defaulters without the intervention of the court, but it did not resolve the corporate insolvency framework in India.

Despite all these efforts, the legal framework of insolvency still remained fragmented, time-consuming and also inefficient. Financially struggling companies and their creditors faced struggles due to long-going litigation and India's poor ranking in the World Bank's Ease of Doing Business report for resolution of insolvency. India recognizing the need for a unified and effective mechanism for insolvency resolution, the government introduced the Insolvency and Bankruptcy Code (IBC), 2016.

This new landmark legislation consolidated multiple insolvency laws of India into a single framework, with also introducing Corporate Insolvency Resolution Process (CIRP) with strict timeline up-to 180 days, which can be extended maximum by 90 days, i.e. maximum 270 days. To ensure an impartial resolution process the National Company Law Tribunal (NCLT) was introduced under the IBC 2016. With several amendments over the years the legislation has strengthened by also introducing pre-pack insolvency for MSMEs.

The impact of the IBC 2016 has been largely positive and significant, faster resolutions, better and higher recoveries for the creditors, and also increased confidence in India's financial and corporate sector ecosystem. Landmark cases like the Essar Steel case and Binani Cement case have demonstrated its effectiveness, making India's insolvency process in India faster and more transparent.

Process of Insolvency Resolution under IBC 2016

The Insolvency and Bankruptcy Code (IBC), 2016, provides a structured and time-bound mechanism for resolving the insolvencies of the corporates including businesses and firms. This process applies to corporates, firms and individuals too ensuring a streamlined process for debt resolution. IBC 2016 aims to maximise the asset value, promote entrepreneurship, and also maintain the discipline of credit in the economy. The insolvency resolution process under IBC 2016 is primarily governed by the National Company Law Tribunal (NCLT) for corporates such as businesses or firms and the Debt Recovery Tribunal (DRT) for individuals and also the partnership firms.

Under Section 4 of the IBC, insolvency proceedings can be initiated by the creditors when a corporate or individual debtor defaults on amount of ₹1 crore or more as defined by the government under the Insolvency and Bankruptcy Code. This process can be initiated by financial creditor under Section 7, operational creditors under section 9, and corporate creditors under Section 10. Financial creditors such as the banks and other financial corporates can file an application before the NCLT when a debtor defaults. The tribunal must within 14 days determine whether the application is completed or not.

An operational creditor such as the vendor or supplier must serve a demand notice to the corporate debtor before approaching the NCLT. In case debtor fails to respond within 10 days, the creditor can file an insolvency application. A corporate debtor itself can file an insolvency resolution before the NCLT it is sees an upcoming inability to meet its financial obligations. Once the application is admitted, a moratorium under Section 14 is imposed.

The moratorium period halts all pending legal proceedings, gives a legal authorization to debtors to postpone their payment liabilities, and also the enforcement of security interests against the debtors. This period also provides relief and prevents the erosion of the value of the assets while a resolution plan is being prepared. Under section 16, the NCLT appoints and Interim Resolution Professional (IRP) within 14 days of the admission of case. The IRP takes over and oversees the management and operations of the debtor and collect the claims from the creditors. The IRP also constitutes the Committee of Creditors (CoC) under Section 21, comprising all financial creditors. The CoC plays a crucial role in the decision-making process.

Once the Committee of Creditors is formed, The CoC appoints a Resolution Professional (RP) under Section 22 of the IBC. The RP takes the charge from the IRP and oversees the entire insolvency resolution process. The RP invites resolution plans from the potential bidders, including investors and the rival firms, seeking to revive the debtor. Under Section 30, resolution applicants submit their proposed plans.

The resolution plans must ensure repayment to the creditors, continuation of the business, and also compliance with the applicable laws. The CoC give their votes on the resolution plans, requiring at least 66% approval under the Section 30(4). Once a plan gets selected, it is submitted to the NCLT for approval under Section 31. If the plan gets approved, the plan is binding on all stakeholders and is implemented under the RP's supervision.

If no resolution plan is approved within 180 days, which is extendable up to 330 days as per Section 12 of the IBC, the debtor enters into the process of liquidation under Section 33. The liquidation process includes the appointment of a liquidator to the assets and distribute the proceeds. This distribution follows the waterfall mechanism mentioned in the Section 53 of the IBC, prioritizing the payment in the following order: insolvency resolution costs, secured creditors and workmen's dues, unsecured financial creditors, government dues and other unsecured creditors and at last the equity shareholders.

The Liquidator who was appointed under the Section 34, takes charge of all the assets, evaluates the claims submitted by various creditors and then proceed with the sales of the assets as per the guidelines provided under the IBC. The assets may be sold through auctions or private sales or other measures as deemed fit for the target of getting maximum value for creditors. The proceeds from the sales is then distributed in a structured manner, ensuring that the debts which are at priority gets cleared first before any payments are made to unsecured creditors or shareholders.

During the process of liquidation, the Liquidator is responsible for maintaining transparency and efficiency in the process, ensuring that the stakeholder's interests are protected. The Liquidator must also prepare a step-by-step progress report of the proceeding and then submit it to the adjudicating authority. This process should be completed within one year; however, in exceptional cases, the timeline may be extended with the approval of the NCLT. The IBC 2016 also emphasizes minimizing delays and ensuring that the insolvency resolution does not keep lingering indefinitely, as delays could erode the value of the assets.

If the liquidation process concludes successfully, the company gets dissolved under Section 54. A final report is submitted to NCLT, and upon the approval, the debtor is ceased to exist as a legal entity. This efficient and structured mechanism ensures that even in the cases where resolution fails, there is a systematic approach of distributing assets and cease the existence of the insolvent entity in legally sound manner.

The Insolvency and Bankruptcy Code: Features and Objectives

The Insolvency and Bankruptcy Code (IBC) of 2016 was a watershed reform aimed at overtaking India's insolvency structure. One of its primary objective of introducing Insolvency and Bankruptcy Code was to bring together various insolvency laws into a single and a rational legislation, i.e. making the legal procedure simpler and reducing obliqueness and ambiguities associated. The IBC introduces a time-bound resolution process, which mandates the insolvency proceedings to be completed within 180 days, and can be extended by a maximum of 90 days, to ensure that asset value remains unchanged and interests of the creditors are safeguarded. This was a significant shift from the earlier regime, where cases could hang on for years without resolution.

A keystone feature of IBC is its creditor-centric approach. Financial creditors, such as banks and financial institutions, are enfranchised and given powers to initiate and proceed with insolvency proceedings against defaulting and insolvent businesses and companies. Once the proceedings begin, a Committee of Creditors (CoC) is formed to take-over the proceedings, which comprises these financial creditors, who have the authority to approve or reject these resolution plans. Decisions that are to be given by the CoC require a 66% majority, ensuring that the resolution process is driven with the consideration of those tectonic financial stakes. This mechanism aims to balance the interests of creditors and debtors, hence promoting fair negotiations and feasible restructuring plans.

The IBC also emphasizes the revival of businesses that have fair chances of thriving rather than liquidation of these businesses. The code emboldens the submission of resolution plans that can restore the normal functioning of the stressed companies or businesses, thereby conserving jobs and contributing to economic growth. Additionally, with the introduction of Pre-packaged insolvency resolutions, made especially for Micro, Small, and Medium Enterprises (MSMEs), business owners now have a chance to stay in control while working on a recovery plan. This approach helps to keep legal costs down which in return also make the process smoother and more accessible to the small business owners, helping them to get back on their feet faster.

Case studies about IBC workings

From the time since The Insolvency and Bankruptcy Code (IBC) was introduced in 2016, it has played a crucial role in resolving insolvency cases, including the high-profile cases too. It helped and will continue helping creditors recover a large part of their dues while also giving financially struggling businesses, companies, and individuals a chance to revive.

Some Case Studies about IBC:

• Essar Steel Insolvency Case (Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.)
  This was a landmark case under the IBC, where the Supreme Court upheld the rights of the Committee of Creditors (CoC) and clarified the distribution of proceeds among various stakeholders.
  
  Essar steel, who once was a major player in India's steel industry, faced heavy financial hardship due to increasing debt and unfavourable market conditions. With outstanding loans of ₹49,000 crore, the company became one of the 12 large non-performing assets (NPAs) which was identified by the Reserve Bank of India (RBI) in 2017 for insolvency proceedings under the supervision of the National Company Law Tribunal (NCLT), and multiple bidders, including ArcelorMittal, showed interest in acquiring the company.
  
  The resolution faced significant legal obstructions, especially from the original promoters, who attempted to reclaim the company by offering a huge amount of ₹54,389 crore for settlement proposal which is ₹12,389, significantly higher than the winning bid of ₹42,000 crore from ArcelorMittal. However, the Supreme Court stepped in and ruled in favour of ArcelorMittal's bid, highlighting that financial creditors have priority over operational creditors when distributing recovered funds.
  
  Although the IBC has set a 330-day deadline for resolving insolvency cases, The Essar Case was dragged on for over 865 days- result of various delays. However, the final resolution to this case led to a humongous 92% recovery rate for the financial creditors, making it one of the most successful cases under the Insolvency and Bankruptcy Code, 2016.
  
  The Essar Steel case was an important decision in India's insolvency laws. It gave more power to financial creditors, made the resolution process faster, and cleared doubts about who gets paid first. However, it also showed how big corporate insolvencies can be complicated, with long legal fights and interference from company owners delaying the process.
   
• Binani Cement Insolvency Case (Binani Industries Limited v. Bank of Baroda & Others)
  The Binani Cement Insolvency Case was one of the landmark cases under the Insolvency and Bankruptcy Code (IBC), 2016 which played an important role in shaping insolvency resolution procedures in India and also one of the few cases in India under IBC which achieved 100% recovery rate.
  
  When Binani Cement Limited (BCL), a part of Binani Industries Limited, failed to repay loans amounting to ₹3,974 crore to, it led Bank of Baroda (BOB) in 2017 to proceed with insolvency proceedings against BCL. Following the initiation of the proceedings, a Committee of Creditors (CoC) was formed to review bids from potential buyers across the country. In the bidding, Dalmia Bharat Cement, in partnership with Bain Capital, was originally declared the winning bidder with an offer of ₹6,350 crore. However, Ultratech cement, a part of Aditya Birla Group, later made a revised bid of ₹7,950 crore, significantly higher than Dalmia Bharat's offer.
  
  Despite the better financial offer from the Ultratech, the Resolution Professional (RP) and CoC decided to stick to their original decision. Hence, rejecting the revised bid, while quoting procedural prohibitions. The rejection of Ultratech's bid led to a legal battle. Binani Industries, the parent company of BCL, approached the National Company Law Appellate Tribunal (NCLAT) and eventually to the Supreme Court of India. The Supreme Court ruled in favour of Ultratech Cement, highlighting the conclusion that the highest bid should be considered in insolvency resolutions so that the creditors could enjoy maximum recovery.
  
  As a result of the Supreme Court's decision, creditors recovered 100% of their dues, making the Binani Cement insolvency resolution one of the rare cases where full recovery was achieved under the IBC 2016. In the end, the proceedings resulted in Ultratech Cement successfully acquiring Binani Cement, showcasing the IBC's effectiveness in resolving complex insolvencies while protecting creditor interests.
  
  This case also sets an excellent example of late-stage bidding in insolvency proceedings, showing that grabbing the best value for creditors is a key feature of the IBC.
   
• Jet Airways Insolvency Case (State Bank of India v. Jet Airways (India) Ltd.)
  Jet Airways who was once India's largest private airline, ceased and stopped its operations in April 2019 due to severe financial distress, leaving thousands of employees with unpaid salaries and creditors with massive outstanding dues that had to be paid off. The airline failed to pay loans amounting more than ₹8,500 crore to creditors including State Bank of India (SBI), Yes Bank, and Punjab National Bank (PNB). The crisis kept growing from factors such as intense competition from other airlines, high fuel costs, and poor financial management, leading to lack of monetary funds that made it impossible for the airline to continue its operations.
  
  In June 2019, a group of lenders which was led by SBI filed an insolvency petition against Jet Airways under the Insolvency and Bankruptcy Code (IBC), 2016 in the National Company Law Tribunal (NCLT), Mumbai bench. The tribunal accepted the case and then appointed Grant Thorton as the resolution professional. The insolvency resolution process enticed interest from multiple investors, but after persistent and overlong negotiations and multiple failed attempts, the airline was finally acquired by the Jalan-Kalrock Consortium in 2021 for ₹1,375 crore.
  
  Despite the resolution, few challenges did remain. Creditors were expected to recover only a 5% amount on their total claims, making it a proceeding where the financial recovery was significantly low. However, the revival of Jet Airways under new management beckoned hope for employees and the aviation sector. The case also highlighted inefficiencies in the resolution process, as it took over four years to finish and get through, exceeding the stipulated 330-day timeline under the IBC. The Jet Airways insolvency case remains one of the most high-profile examples of a corporate resolution under the IBC, showcasing both its potential for revival and the need for structural advancements and developments to facilitate resolutions.
   
• DHFL Insolvency Case (Reserve Bank of India v. Dewan Housing Finance Corporation Limited)
  Dewan Housing Finance Corporation Limited (DHFL) was one of the India's largest housing finance companies until it was terminated under financial mismanagement and spurring debt. The company, which had a loan liability of over ₹95,000 crore, defaulted on multiple payments in 2019, which in the end leading to a crisis in the non-banking financial company (NBFC) sector. The financial distress was supplemented with allegations of fraud, misappropriation of funds, and also links to the Wadhawan Group, which reportedly drained off large sums of money through shell companies.
  
  In November 2019, the Reserve Bank of India (RBI) superseded DHFL's board and referred the company for insolvency proceedings under the Insolvency and Bankruptcy Code (IBC)—making it the first NBFC to be resoluted under the Insolvency and Bankruptcy Code (IBC) framework. Then this case was admitted by the National Company Law Tribunal (NCLT), Mumbai Bench, and R Subramaniakumar was appointed as the administrator of this case.
  
  During the resolution process, several bidders, including Oaktree Capital, Adani Group, and Piramal Group, expressed and showcased their interest in acquiring DHFL's assets. After a competitive bidding process, the Piramal Group won the bid with an offer of ₹37,250 crore, including a straightforward cash payment and deferred payments over time. The resolution plan was approved by the NCLT in June 2021, marking it one of the largest successful resolutions of a financial institution under the IBC.

Despite the resolution, creditors faced significant losses, with an average haircut of nearly 65%, meaning that they could only regain a fraction of their original dues. However, the resolution of DHFL set a precedent for handling insolvency cases in the financial sector and corroborated the role of the IBC in resolving systemic financial crises. The case also demonstrated the importance of stricter regulatory oversight & supervision and corporate governance in the NBFC sector to prevent similar failures in the upcoming future.

Challenges and Shortcomings
Despite its successes, the IBC faces numerous challenges that confines its effectiveness. One major issue is delay in resolution, oftentimes exceeding the dictated 180-270 days due to legal disputes and NCLT backlogs. The Essar Steel case, which took over 800 days, highlights this problem, as interminable litigation reduces asset value and delays recoveries.

One major issue with the IBC is that the creditors sometimes face huge losses of their owed money, sometimes even getting less then 10% of the amount owed. As for example, The Videocon Case, where creditors got only 5% of their claims. These concerns have raised questions such as whether businesses are valued fairly and if the IBC is really working well or not. Such huge losses also make banks hesitant to provide loans to corporates or individual, which affects the flow of money in the economy.

The IBC also struggles with service-sector insolvencies, as seen in Jet Airways. Unlike manufacturing, where assets can be sold, service firms rely on operational continuity, making resolution complex. High liquidation rates in aviation and financial services point out the need for sector-specific frameworks. Additionally, the lack of a cross-border insolvency mechanism creates complications and several issues for firms with global operations. Without clear guidelines and framework, foreign creditors and assets remain difficult to manage, which in return weakens India's insolvency framework. While the IBC has improved debt resolution, addressed delays, valuation issues, sector-specific needs, bringing out solutions for cross-border complexities is essential for making it more effective.

In addition to these challenges, there are concerns regarding the inconsistent valuation of distressed assets. The Valuation process often leads to significant differences between the value of the assets and the actual recovery value. Some insolvency cases also face poor bidder's participation due to uncertainty of assets valuation, while in others, assets stripping by promoters present in the insolvency proceedings reduces the company's worth. These discrepancies lead to lower recoveries for creditors, as seen in cases like that of Reliance Communications, along with stringent regulatory oversight, is necessary to ensure the fair pricing of the assets distressed and maximise recovery.

Reforms and Future of IBC

To improve the efficiency and effectiveness of the IBC, several reforms are necessary. As NCLT has accumulated a lot of backlogs, so by increasing judicial capacity i.e. more number of judges and establishing fast-track insolvency benches could help facilitate and accelerate case processing. Strengthening and making the already existing insolvency process by simplifying the procedure and raising awareness among MSME's is also essential for wider adoption and effectiveness.

Another crucial and important reform is the adoption of internationally recognized cross-border insolvency frameworks, such as the UNCITRAL Model Law on Cross-Border Insolvency. Implementing such kind of a framework would provide greater legal assurance and confidence for Indian businesses operating in multiple jurisdictions and align India's insolvency laws with best global practices.

Additionally, compressing the financial losses for creditors by improving asset valuation methods, improving due diligence, and encouraging better negotiation mechanisms could probably enhance creditor confidence in the system. Ensuring a balance between creditor recovery and debtor protection will definitely be essential for maintaining a fair and effective insolvency framework.

Conclusion
The Insolvency and Bankruptcy Code (IBC) 2016 has brought a major change in how India deals with insolvency issues. By introducing a structured and time-bound process, it has helped speed up the proceedings as well as the resolutions, combined with increased investor confidence, and improved India's global business rankings. Cases like the Essar Steel and Jet Airways showcased that the IBC 2016 is worthy of reviving struggling companies and ensure better returns for its's creditors.

But despite its strength positive impact, the legislation does faces challenges. Litigation Delays, long legal battles, and heavy creditor losses often makes it lose its effectiveness. Many cases being dragged on beyond the 330-day deadline due to NCLT backlogs and complex legal proceedings. Creditors frequently recover far less than they are owed, making them hesitant to lend in the future. The absence of a cross-border insolvency framework also creates difficulties for Indian businesses operating in multiple countries.

To overcome these problems, judicial system should be strengthened, NCLT capacity should be increased, and making litigation faster are crucial. Improving valuation techniques, streamlining pre-packaged insolvency options, and also adopting global best practices can also make the resolution process smoother, more effective and more reliable.

Looking ahead at future, India must now strike a balance between protecting creditors interests and ensuring business sustainability. The IBC should not just be about recovering debt but also about helping businesses restructure and preventing financial crisis too. If effectively improved, it can become one of the most efficient insolvency laws in the world which can also make India's reputation as a strong, stable, and investor-friendly economy.