India's Insolvency and Bankruptcy Code

How the 2016 bankruptcy law shifted power from defaulting owners to creditors, set time limits for resolving failing companies, and what results it has achieved.

Before 2016, resolving a failing company in India could take many years. Creditors recovered little, and owners who defaulted often kept control. The Insolvency and Bankruptcy Code, or IBC, aimed to change this.

Why bankruptcy law matters

Economists see good bankruptcy law as essential for a healthy economy:

Creditors are more willing to lend if they can recover money when borrowers fail.
Resources, such as factories and workers, can move from failing firms to productive uses.
Entrepreneurs can take risks knowing failure can be resolved.

How the IBC works

When a company defaults, a creditor or the company itself can apply to the National Company Law Tribunal, or NCLT.
If admitted, control of the company shifts from the owners to an insolvency professional.
A committee of creditors, mainly financial creditors, decides the company’s fate.
Investors submit resolution plans to buy and revive the company.
If no plan is approved within the time limit, the company is liquidated.

The law set a time limit, later extended to 330 days including litigation.

Creditor in control

A key shift was from “debtor in possession” to “creditor in control”. Section 29A also bars many defaulting promoters from buying back their companies cheaply.

Results

Many large cases were resolved, such as Essar Steel, bought by ArcelorMittal in 2019, with lenders recovering a large share of their claims.
The threat of losing control encouraged many borrowers to settle debts before cases were admitted.
Overall recovery rates for creditors have averaged around a third of admitted claims, better than earlier systems but lower than hoped.

Challenges

Delays: many cases exceed time limits due to litigation and tribunal capacity.
Haircuts: in some cases, creditors accepted very large losses.
Liquidation: many cases end in liquidation rather than revival.

The steel plant

A steel company defaults on huge loans. Under the old system, the case would drag on for years. Under the IBC, lenders take control, invite bids, and a global steelmaker buys the plant. Production continues, jobs are saved, and banks recover much of their money.

Thinking bankruptcy means a business simply shuts down

Bankruptcy processes aim first to revive viable businesses under new owners. Liquidation is a last resort.

Key takeaways

The IBC, passed in 2016, created a time-bound process for resolving failing companies.
Control shifts from defaulting owners to creditors.
Many large cases were resolved, and the law encouraged early settlements.
Delays, large haircuts and many liquidations remain challenges.