The Insolvency and Bankruptcy Code, 2016 ('IBC/the Code') was introduced as need
of the hour, to consolidate and revamp the existing insolvency and bankruptcy
framework in India by enacting a robust law that would give certainty of
process, time and outcome to the creditors, borrowers and other market
participants of a developing economy.
Prior to the enactment of the Code, the insolvency procedure was governed by The
Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920,
which were old and seemed to be ineffective.
The dependency thereafter, shifted
to laws such as the SICA (Sick Industrial Companies Act), 1985, Recovery of
Debts Due to Banks and Financial Institutions Act, 1993, SARFESI (Securitisation
and Reconstruction of Financial Assets and Enforcement of Securities Interest
Act), 2002, Companies Act, 1913, 1956 and later 2013.
However, a need arose, to
shift the focus to implement a mechanism which balanced needs of both the
company as well as the creditors, rather than bluntly liquidating and
distributing the remains of a debt-ridden company among its creditors in order
of priority. This led to the enactment of the Insolvency and Bankruptcy Code,
The Insolvency and Bankruptcy Code, 2016 was passed by Lok Sabha on 5th May,
2016 and by the Rajya Sabha on 11th May, 2016. The Code received the assent of
the President of India on 28th May 2016 and became effective in December 2016.
Since its inception, the Code has undergone a series of amendments, which have
been or are under challenge before the Hon'ble Apex Court. Several
notifications, orders and judgements including those from the Apex Court have
ensured a near satisfactory implementation of the Code. These developments have
enriched the jurisprudence and practice of insolvency law in the country. There
have been instances where various sections of the Code and in fact, the Code
itself has been challenged, but such scrutiny is essential and inevitable to a
relatively new law coming into force.
According to a World Bank statement, IBC has improved the recovery rate of
stressed assets to 48% in two years from 26% in the pre-IBC era. It is thus safe
to say that the Code has largely been able to meet up to its expectations till
now. The Courts and Tribunals have also played a key role in upholding its
sanctity by adjudicating and disposing the cases in a timely manner, as far as
The recent outbreak of Covid-19 and nation-wide lockdown has brought
about a significant slowdown to the economy. The ripple effect of the lockdown
cannot be ascertained; however, it is likely that innumerable businesses will
feel the heat of the lockdown in the coming months. The Central Government in
order to aid businesses, which in its view are likely to be most affected, and
are likely to be in a position where they would be unable to pay their debts,
has proposed the suspension of Sections 7, 9 and 10 of the Code.
This Article attempts to throw light on the objectives and evolution of the Code
and whether the recent proposal to suspend Sections 7, 9 and 10 of IBC for a
period of six months to up to one year by the Government, will dent the very
purpose and objective, for which the Code was enacted.
Key Objectives Of The Code
Some of the key objectives of the Code are elucidated hereunder:
- To consolidate and amend all existing insolvency laws in India.
- To simplify and expedite the Insolvency and Bankruptcy proceedings in
- To protect the interest of creditors including stakeholders in a
- To revive the company in a time-bound manner.
- To promote entrepreneurship.
- To pass on the necessary relief to the creditors and consequently
increase the credit supply in the economy.
- To work out a new and timely recovery procedure to be adopted by the
banks, financial institutions or individuals.
- To set up an Insolvency and Bankruptcy Board of India.
- Maximization of the value of assets of corporate persons.
The primary objective of the Code inter alia is to simplify and expedite the
Insolvency and Bankruptcy proceedings in India in order to maximize the assets
of corporate debtors and provide remedy to its operational and financial
creditors. However, one cannot lose sight of the fact that significant amounts
of recoveries have been made from the defaulting entities since the
implementation of IBC.
The Code provides a robust framework for market-driven
and time-bound resolution process. The credible threat of IBC process being
that, a defaulting company may lose administrative control, has significantly
changed the mindset and behaviour of the debtors.
Many debtors are now trying to
resolve their disputes and find practicable and innovative methods to repay
their dues or service loans in order to escape the resolution process under IBC.
Sale of non-core assets, divestment in group companies, release of investments,
sale of idle properties and even capping diversification plans and focusing on
consolidation of business and other options are being weighed by such debtors.
Thus, honouring loan commitments is also gradually becoming a priority for
borrowers. As a consequence of the above aspects, companies are slowly becoming
stable in their functioning, which ultimately is the object of enactment of IBC.
Evolution Of The Code As It Stands Today
The Code as we see it today has, like various other laws, undergone
constitutional scrutiny and has evolved over the short span of time. Sections 7
to 10 of IBC, are the most commonly and widely invoked provisions under the
Code, with the maximum number of applications filed before the National Company
Law Tribunal (NCLT), under these provisions.
Sections 7 to 10 of the Code, deals with the initiation of the insolvency
resolution process of a Corporate Debtor by either a Financial Creditor,
Operational Creditor or Corporate Applicant. On many occasions, the provisions
have been misused which has led the Courts to delve upon strict interpretation
of these provisions and bring about changes/ amendments where ever necessary. A
few notable judgments, which have played a key role in the evolution of the
insolvency process under the IBC are worth highlighting.
- M/s Innoventive Industries Ltd. vs. ICICI Bank 
In this case, the Hon'ble Supreme Court expounded the legislative intent behind
enactment of the Insolvency and Bankruptcy Code, 2016. The Court, in this case
explained the paradigm shift in Law to render guidance to Courts and Tribunals
while dealing with cases under the Code. The Court has held that the moment
initiation of the corporate insolvency resolution process takes place, a
moratorium is announced by the adjudicating authority under the Code by which
institution of suits and pending proceedings etc. cannot be proceeded with until
the approval of a resolution plan as required by the Code.
- Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. 
The judgment of the Hon'ble Apex Court inter alia laid down the reasoning behind
the differential treatment of financial creditors and operational creditors;
clarified the role of a Resolution Professional who acts as the facilitator to
the resolution process; and stated that IBC is not a mere recovery legislation
for creditors but actually provides an opportunity for a debt-ridden
organization (legally known as the 'Corporate Debtor') to be back on its feet.
- Mobilox Innovations Pvt Ltd vs. Kirusa Software Private
The Supreme Court, in this case held that while determining if a dispute exists
with the debtor in regards to the payment of any debt, the NCLT will be required
to see only if there is a dispute and that the NCLT may not go into the merits
of such dispute.
- Macquarie Bank Limited vs. Shilpi Cable Technologies Ltd.
In this case, the Supreme Court settled the legal proposition under the
Insolvency and Bankruptcy Code, 2016 to hold that Section 9(3)(c) of the Code is
directory and not mandatory in nature and secondly, the Demand notice under the
Code can be issued by the Advocate on behalf of the operational creditor.
- PR. Commissioner of Income Tax v. Monnet Ispat and Energy
The Apex Court, while referring to statutory provision under Section 238 of the
Code, held that the Code will override anything inconsistent with the Code
contained in any other enactment, including the Income-Tax Act.
- Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj & Ors. 
The National Company Law Appellate Tribunal (NCLAT) in the case while brushing
aside the Respondent's contention noted that since Section 138 of Negotiable
Instrument (NI) Act is a penal provision, it empowers the court of competent
jurisdiction to pass order of imprisonment or fine, which cannot be held to be
proceeding or any judgment or decree of money claim.
It was also opined by the Appellate Tribunal that imposition of fine cannot held
to be a money claim or recovery against the Corporate Debtor nor order of
imprisonment, if passed by the court of competent jurisdiction on the Directors,
thus offence under Section 138 of NI Act does not come within the purview of
Section 14 of the Code. In fact, no criminal proceeding is covered under Section
14 of IBC.
- Alchemist Asset Reconstruction Company L. Vs. Hotel Gaudavan
The Supreme Court held that the mandate of the new Insolvency Code is that the
moment an insolvency petition is admitted, the moratorium that comes into effect
under Section 14(1)(a) expressly interdicts institution or continuation of
pending suits or proceedings against Corporate Debtors and Arbitration
proceedings are also hit by moratorium.
- Chitra Sharma Vs UOI 
As a result of the amendment brought about in the definition of 'financial
debt', amounts raised from allottees under real estate projects are deemed to be
amounts “having a commercial effect of a borrowing”. Hence outstanding amounts
to allottees in real estate projects are statutorily regarded as financial debts
and such allottees have been brought within the purview of the definition of
- B.K. Educational Services Private Limited Vs Parag Gupta
And Associates 
It was held that the Limitation Act, 1963 is applicable to applications filed
under Sections 7 and 9 of the Code from the inception of the Code. Article 137
of the Limitation Act, 1963 gets attracted. “The right to sue”, therefore,
accrues when a default occurs.
- Pioneer Urban Landand Infrastructure Ltd Vs UOI 
The Supreme Court, in this case, has dealt with the amendment of inserting an
Explanation to Section 5(8)(f), which made allottees of real estate projects to
be “financial creditors” so that they may trigger the Code, under Section 7,
against the real estate developer, which was upheld. In addition, being
financial creditors, allottees were held to be entitled to be represented in the
Committee of Creditors by authorised representatives.
It was also observed and opined that remedies that are given to allottees of
flats/ apartments are therefore concurrent remedies. Such allottees of
flats/apartments are in a position to avail remedies under the Consumer
Protection Act, 1986, Real Estate Regulatory Authority (RERA), as well as under
It can be seen that the Courts have also played a significant role in the
evolution of IBC. The IBC is a step towards regularizing the insolvency process
in India. It has amended over 11 legislations in India, bringing about one of
the most significant change to commercial laws in recent times. It has also
become a very important tool for banks to regularize multitudes of
non-performing assets plaguing the country's economy.
The IBC has brought a plethora of changes and aims to reduce the amount of bad
debts that have saddled the economy. We are beginning to see this through
various companies successfully concluding their insolvency process. The Code in
itself is a comprehensive legislation with a speedy and specific procedure for
dealing with insolvency. The time-bound nature of IBC is a win-win situation as
the resources of the companies are placed at the right place in time, whether it
is by payment to creditors or by winding up. The company does not keep running
in losses for endless time period causing a setback to the economy in whole and
affecting the creditors individually, in the process.
As per data released by the Insolvency and Bankruptcy Board of India (IBBI) ,
as of 31st December, 2019, the 190 companies that had defaulted on loans yielded
resolution plans with different degrees of realization. Claims worth Rs3.52
trillion in total had been filed by financial creditors, primarily banks.
Of this, around Rs1.52 trillion 43.1% of the claims under consideration have
been recovered. This is much better than the rate of recovery before IBC was put
in place. India's positive leap in the ease of doing business is attributable
to continuous, conscious and collective efforts of the legislature, Ministry of
Corporate Affairs, as well as the Indian judiciary.
IBC has played a pivotal role in the aforesaid improvements in India's overall
rankings. Thus, one can say that the Code as we see today has evolved
drastically from a series of amendments and the judicial pronouncements by
various Courts and Tribunals, which have made it more robust and meaningful.
However, this is not the end of the various changes we are seeing in the Code.
IBC, like any other law, will still undergo challenges and tests of law, where
its provisions and the Code itself will be questioned. This process will bring
about several rounds of amendments to this relatively new law and make it more
evolved and stronger, which would thus cater to the larger good.
Notification To Increase The Threshold Limit To Initiate Insolvency
Proceedings And The Speculation Surrounding The Proposed Suspension Of Section
7, 9 And 10 Of IBC
In a very recent development, due to the emerging financial distress faced by
most entities on account of the large-scale economic distress caused by COVID
19, the Central Government vide a notification on 24th March, 2020, raised
the threshold of default under Section 4 of the IBC from the existing threshold
of Rs 1 Lakh to Rs 1 Crore. The Central Government is further proposing to
suspend Sections 7, 9 and 10 of the Code for a period of six months to up to one
year, in order to protect borrowers, affected by the pandemic, from probable
Although, the proposal of the Central Government appears to be based primarily
on the exigencies of the borrowers, however, one cannot ignore the cascading
effect of such a proposal on the creditors, who are also equally affected
financially, due to the pandemic. It is undisputed that the Code, when it was
introduced had come as a breath of fresh air, for several classes of creditors.
These included Financial Institutions, individuals and MSMEs, who were
struggling to recover their dues from their debtors for the undisputed amounts
including the smaller amounts, but had no other remedy than to approach the
Civil Court or seek recourse to Arbitrations, as the case may be, and entangle
themselves into a long drawn litigation to recover their dues. However, with the
introduction of IBC, and most importantly the provisions under Section 7, 9 and
10 of the Code, the Creditors appeared to have found an expedient, cost
effective way to recover their undisputed amounts.
Debtors, pushed under the Code by the invocation of the provisions under Section
7 to 10, always have a threat looming over their heads, where they could lose
control of their company and be subjected to a resolution process. Resultantly,
there have been increasing number of debtors who are repaying their loans and
settling their dues to avoid the insolvency process, which otherwise, in any
Civil Court would take several years, where the debtors would drive the
creditors to undergo the ordeal of long trials, even in cases, where the amounts
due were undisputed.
The plight of the aggrieved would never end there, as a lot of creditors, would
then be required to initiate execution proceedings. This would again be time
consuming, where after too, the possibility of recovery remained uncertain. This
scenario has been completely changed by the introduction of the IBC, where the
debtors are themselves approaching the creditors for settlement of their dues.
Though, it has been very clear through various judgments that IBC is not a tool
for recovery mechanism, however, it certainly has become a mechanism to recover
the undisputed debts, in a more efficient, expeditious and cost-effective
With the implementation of IBC, thousands of cases were brought to the NCLT, the
adjudicating authority under the IBC, and were settled even before admission. As
per a report available on IBBI's website , almost Rs 2.02 lakh crore of debt
pertaining to 4,452 cases were disposed of even before admission into the IBC
process, as the borrowers made good the amounts in default to the creditors.
If these recoveries are accounted for, IBC might have helped resolve cases
involving over Rs 5 lakh crore unpaid dues. As a percentage of claims, banks
recovered on average 42.5% of the amount filed through the IBC in the financial
year 2018-19, against 14.5% through the SARFAESI resolution mechanism, 3.5%
through Debt Recovery Tribunals and 5.3% through Lok Adalats. Against Rs 1.66
lakh crore claims involved under IBC, the recovery was Rs 70,819 crore. Through
the SARFAESI mechanism, it stood at Rs 41,876 crore. Recoveries through Debt
Recovery Tribunals and Lok Adalats were Rs 10,575 crore and Rs 2,816 crore,
The stipulated timeframe for resolution of stressed assets under IBC is
significantly lesser than for other mechanisms. The entire process has also
inculcated fear in the minds of promoters over defaults and delays in
resolutions as whatever kingdoms they've established might be taken away. The
overall credit culture is improving as the paybacks are more efficient because
the promoters are wary of being dragged into insolvency over defaults.
No doubt, that the threshold limit of Rs. 1 Lakh was definitely on a much lower
side, which gave the creditors an upper-hand. In some cases, gave the creditors
the liberty to misuse the process of the Code, which is contrary to the main
objective and the purpose of the Code, i.e. revival and restructuring of the
However, increasing the threshold to Rs 1 Crore has caused grievance to a larger
section of the Creditors. Furthermore, the proposal to suspend IBC Sections 7,9
and 10 for a period of six months up to one year, would strike another damaging
blow to the eligible creditors and shall in fact, be a step backwards from what
the Code has achieved till now. In fact, it leaves even the ailing Company
remediless, as it simply means that such a Company shall be deprived of its
right to file an insolvency itself.
The increase in the threshold has taken many players out of the equation
including start-ups and MSME's, who are most hard hit by the COVID-19 Pandemic,
and were already on the lookout for a recourse to recover the debts or
restructuring of their debtors, who are wilfully avoiding payment of admitted
debts. It is however, important to note that the IBC is not a tool to recover
money from the Debtors by escaping the ordeals of trial.
The legislature in its wisdom has clearly defined the term dispute
Section 5(6) of the Code, which provides that the dispute should be pre-existing
before the initiation of the insolvency proceedings under the Code and hence,
avoids its misuse. However, one cannot lose sight of the fact that the threat of
initiation of insolvency proceedings under section 7, 9 and 10 of the IBC have
aided multitude of creditors in recovering most of their dues.
Suspension of Sections 7, 9 and 10 of the Code, would also, in effect, lead to a
situation where Section 14 of the Code is rendered redundant. In such a
scenario, the aggrieved party would have no other option but to avail other
remedies and file appropriate proceedings before the civil/ commercial court or
seek recourse to arbitration, as the case may be. Thus, defeating the very
objective and purpose of the Code.
In these trying times, it would be sufficing to say that, undoubtedly, the
global pandemic has played a pivotal role in disrupting the economy and the
borrower needs adequate time to come out of this regression. However, at the
same time such blanket suspension of the provisions of the Code, would hit the
creditors hard, and especially those, who thrive on limited financial resources
and are already struggling in these turbulent times to adhere to the directives
of the Central Government including payment of full wages to their employees,
without having any source of income during this period. Such measures, though
seem to be in the interest of the some, however, appears to be at the expense of
others and could defeat the very purpose of the Code. This is a significant
departure from what we have achieved after the enactment of the Code.
The opinions expressed herein are entirely those of the authors.
The Authors have made every effort to use reliable and comprehensive
information, but they do not represent that the contents of the reports are
accurate or complete. Nothing herein shall be deemed or construed to constitute
- World Bank's Doing Business Report, 2019.
- (2018) 1 SCC 407
- (2019) 4 SCC 17
- (2018) 1 SCC 353
- (2018) 2 SCC 674
- (2018) 18 SCC 786
- Company Appeal (AT) (Insolvency) No. 306 of 2018
- (2018) 16 SCC 94
- (2018) 18 SCC 575
- (2019) 11 SCC 633
- (2019) 8 SCC 416
- Quarterly newsletter of the IBBI (Oct-Dec 2019)
- MCA Notification No. S.O. 1205(E) dated 24.03.2020
- As per the Reserve Bank of India's report on Trend and Progress of
Banking in India 2017-18