OPINION | Is the IBC creating a stronger credit culture for corporate India?

Is the IBC building a stronger credit culture? The answer is largely yes. The law has made default costly, given lenders real power, and put a clock on a process that once dragged on for years. However, a genuine credit culture needs more than a good law. It needs supporting infrastructure, including more tribunal benches and judges, timelines that are actually met, and fair treatment for every class of creditor.

The Insolvency and Bankruptcy Code, 2016 (IBC or the Code) is now the main law India uses to deal with companies that cannot pay their debts—in the language of the Code, a “corporate debtor” that has committed a “default”. Figures published by the Insolvency and Bankruptcy Board of India (IBBI) for 2025–26 show the law is still doing its job. The Adjudicating Authority, that is, the National Company Law Tribunal (NCLT), approved 233 resolution plans during the year, taking the total from 2016 to 1,427.

On average, these cases took 886 days to conclude, with a median of 751 days. Further, as per the data, creditors have recovered about 170% of the liquidation value, that is, what the corporate debtor would have fetched had it simply been wound up and sold off. In other words, resolving a corporate debtor paid the creditors far more than closing it down or selling it piecemeal.

The IBC brought in a few big changes that alter how borrowers and lenders behave.

A fixed deadline: The Code provides that the corporate insolvency resolution process (CIRP) must be completed within 180 days. It may be extended once by up to 90 days, but in any event, it must be completed within a firm outer limit of 330 days, and that limit includes any time lost in legal proceedings.

Promoters can lose the company: The Code lists persons who are not eligible to be a “resolution applicant”, and this bars certain defaulting promoters, and persons connected with them, from submitting a resolution plan for the corporate debtor. Courts have explained the reason simply: someone whose own conduct pushed the company into trouble should not be allowed to pick it up unless they first clear their dues and remove the disqualification. This has probably changed how business owners behave more than any other part of the law, because a deliberate default can now cost them the company itself.

Lenders take charge: Once the process starts, the financial creditors who lent money to the corporate debtor form a Committee of Creditors (CoC) that runs the show. The management of the corporate debtor vests in a resolution professional, and it is the CoC that decides which resolution plan to accept. The role and duties of the CoC and the resolution professional have since been expanded, including keeping a tab on the insolvency resolution process costs incurred during the CIRP. The Hon’ble Supreme Court has repeatedly held that which resolution plan is to be accepted is a commercial decision for the CoC to take. The role of the Adjudicating Authority is to satisfy itself that the plan complies with the requirements of the Code, but it cannot sit in judgment over the CoC’s commercial wisdom or modify the plan itself.

A freeze on legal action: Once the application is admitted, the Adjudicating Authority declares a moratorium. Suits and proceedings against the corporate debtor are stayed, enforcement of security interests is halted, and recovery of property from the corporate debtor is barred. This stops individual creditors from racing to grab whatever they can and pushes them to work together on a single solution.

A fixed order of payment: The Code sets out the order of priority of payment commonly called the waterfall mechanism, in which the proceeds are to be distributed. In an insolvency resolution process, costs and liquidation costs are paid first, followed by workmen’s dues and debts owed to secured creditors, then employee wages, unsecured financial creditors, government dues, remaining debts, preference shareholders and finally equity shareholders. Because everyone knows the queue in advance, there is no confusion about who is paid what.

It is not only the I&B Code and rules and regulations made thereunder or by IBBI, which have helped in the success of the Code, but even the judicial forums have played a big part in making all of this work. The Hon’ble Supreme Court has time and again held that the law as a whole is constitutionally valid, including the different treatment given to lenders and to suppliers, and the fixed order of payment on a shut-down. The judicial forums have also made clear that the process is not an attack/recovery process on the Corporate Debtor; on the contrary, the aim of the I&B Code is to rescue the business and save its value, not simply to recover money. The notwithstanding section given in the Code, i.e., Section 238, further gives power to the Code and provides that where the IBC clashes with another law, the IBC prevails, and its provisions are to be read in a way that furthers its purpose.

The financial lenders now have reason to admit a bad loan early and act together, because once the Petition under Section 7 is admitted, the promoters shall lose control of the Corporate Debtor and the lenders’ committee takes over. And since defaulting promoters cannot buy their own company back at a discount, there is a strong reason to keep paying on time.

The picture is not all good, though. Lenders often have to accept deep haircuts from what they owe, but much of that loss happened long before the case reached the tribunal. The I&B Code cannot bring back value that has already been destroyed; however, it helps prevent further deterioration.

The Code still has a long way to go, as, by far, it has somehow kept the interests of Financial Creditors secure; however, the Operational Creditors, including employees, are on the losing end, as the safeguard for their interests is at a very low level. They have almost no say in the committee that decides the Resolution Plan, and they stand behind the lenders in the queue for payment. The Courts have said their interests cannot simply be ignored and that a plan must give them the treatment the law requires, but the basic difference between lenders and suppliers remains.

The writer is senior partner, S&A Law Offices.

The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.