Strengthening the Insolvency Law : Daily Current Affairs

Date: 24/01/2023

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Key Phrases: Insolvency and Bankruptcy Code, Adjudicators, Commercial Banks, Creditors, Resolution, Real-Estate Insolvencies, Corporate Debtors, Adjudicating Authority.


  • To further strengthen the insolvency law regime, the government proposed a series of changes, including fast-tracking the process, expanding the scope of the pre-packaged framework and developing an electronic platform with minimal human interface.

Key Proposals:

  • To strengthen the functioning of the IBC, changes to the code are being considered in relation to
    • The admission of corporate insolvency resolution process (CIRP) applications.
    • Streamlining the insolvency resolution process
    • Recasting the liquidation process.
    • The role of service providers under the Code.
  • The Corporate Affairs Ministry has suggested developing a state-of-the-art electronic platform that can handle several processes under the Code with minimum human interface.
  • The ministry has also proposed redesigning the Fast-Track Corporate Insolvency Resolution Process (FIRP).
    • It allows financial creditors to drive the insolvency resolution process for Corporate Debtors (CDs) outside of the judicial process while retaining some involvement of the Adjudicating Authority (AA) to improve the legal certainty of the final outcome.
  • Certain changes with respect to the resolution process for real estate projects have also been proposed.
    • For instance, to enable a resolution professional to transfer the ownership and possession of a plot, apartment or building to the allottees with the consent of the CoC (Committee of Creditors).

What  Is IBC?

  • Insolvency and Bankruptcy Code (IBC) 2016 was implemented through an act of Parliament. It got Presidential assent in May 2016.
  • The bankruptcy code 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
  • It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency. Under IBC, debtor and creditor both can start 'recovery' proceedings against each other.
  • Companies have to complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do not raise objections to the extension. For smaller companies, including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. If debt resolution doesn't happen the company goes for liquidation.

Shortcomings of Proposals:

  • But the proposals leave wide gaps for creative interpretation by all parties.
    • For instance, the proposal that adjudicators should have the authority to penalize those who file "frivolous" applications before the bench does not specify what would be considered frivolous.
    • This would grant excessive power to adjudicators, and, this could result in miscarriage of justice.
    • The suggestion to redesign the fast-track corporate insolvency resolution process looks like a slippery slope that could be twisted to favour one set of applicants over another.
  • Another flaw lies in the way IBC proposals try to recast the adjudication process to reduce the legal agency of operational creditors, especially individuals.
    • This is visible in a suggestion for resolving real-estate insolvencies; the logic of restricting a real estate company’s ongoing projects from the resolution process initiated by families in another struggling project betrays an institutional bias towards the sector.
    • It is strange for a builder to be allowed to claim insolvency for a specific real estate project, but be legally permitted to use funds for other projects.
  • Additionally, the ministry's suggestion that operational creditors should have to gather all information about the defaulting party from institutions (which can be a difficult task) before filing for resolution seems outdated, placing the burden on the wronged party rather than the wrongdoer.
  • It also seems like an attempt to improve the efficiency and speed of the resolution process without addressing head-on the issue of vacant benches or better-qualified adjudicators.


  • Keeping the Fast-Track CIRP outside the judicial process may help in quicker disposal of the CIRP.
  • However, care will have to be taken to ensure that the interests of stakeholders other than the financial creditors are duly protected within the framework provided in the IBC.
  • Ultimately, addressing bankruptcy cases effectively will necessitate addressing the system's shortage of human capacity, rather than relying on indirect methods, in order to achieve the significant change that administrators are aiming for.

Source: Live Mint

Mains Question:

Q. The IBC is a crucial structural reform, which if implemented effectively and in a time bound manner can produce major gains for the corporate sector and the economy as a whole. Critically analyze (250 words).