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India's Insolvency and Bankruptcy Code (IBC), introduced in 2016, was designed to simplify resolving distressed debts. While it has helped resolve over ₹3.5 lakh crore, the process began showing strains. Resolution timelines often stretched far beyond the 330-day target, court rulings added complexity, and government claims sometimes disrupted the priority of payments to creditors.
Challenges Emerge for IBC
Initially met with some doubt, the IBC became a powerful tool, helping to reduce bank non-performing assets (NPAs) and improve operations for rescued companies. However, in recent years, the system struggled to keep up. Resolution times frequently exceeded 600 days, and Supreme Court decisions made the once straightforward, default-driven process less predictable. Government claims sometimes challenged the priority of secured lenders, and acquirers of distressed companies sometimes faced debts from previous owners.
Major Reforms Introduced
Now, Parliament has passed the Insolvency and Bankruptcy Code (Amendment) Bill, 2025. This represents the most significant update since the IBC's creation, addressing four main areas.
Faster Out-of-Court Settlements Introduced
A new Creditor-Initiated Insolvency Resolution Process (CIIRP) allows financial institutions to work out distressed situations directly, outside of the formal court system (NCLT). Under CIIRP, company promoters can retain control, but an appointed professional can block actions that would destroy value. This process has a 150-day limit, providing a quicker option than the full Corporate Insolvency Resolution Process (CIRP). If promoters are uncooperative, the case can revert to the standard CIRP, with the risk of promoter removal.
Curbing Delays and Court Discretion
The reforms limit courts' ability to reject insolvency applications after a default has occurred, addressing issues seen in past cases. Applications must now be admitted once default is proven. The amendments also clarify that security rights are based on agreements, not just laws. This prevents government dues from automatically gaining priority over other creditors, overturning a previous ruling. The changes also ensure secured lenders are paid based on their collateral's value, encouraging company rescue over liquidation.
Clearer Rules for Acquirers and Global Deals
The 'clean slate principle' is now officially written into law. This means successful buyers of distressed companies can acquire them free of past debts, preventing ongoing claims from government bodies. New provisions also establish recognition for cross-border insolvencies, following UNCITRAL Model Law guidelines for managing multinational company failures. The law also sets the stage for rules governing the insolvency of entire corporate groups.