Insolvency and Bankruptcy Code (IBC)

Latest Context

The Insolvency and Bankruptcy Code (IBC) (Amendment), 2026 has introduced the Creditor-Initiated Insolvency Resolution Process (CIIRP) as a new insolvency mechanism aimed at enabling faster corporate restructuring, reducing value destruction, and improving the efficiency of insolvency resolution. However, the amendment has also generated debate regarding its constitutional validity, fairness among creditors, and its impact on India's insolvency ecosystem.

Introduction

• Since its enactment in 2016, the Insolvency and Bankruptcy Code (IBC) has transformed India's insolvency framework by replacing fragmented laws with a unified, time-bound resolution process.

• Nevertheless, the IBC has consistently struggled to balance two competing objectives—providing financially distressed companies an opportunity to recover while simultaneously protecting the legitimate interests of their creditors.

• This dilemma is often described as the "Chakravyuha Challenge," inspired by the Mahabharata, where entering a complex formation is relatively easy but escaping it is extremely difficult.

• Similarly, while companies can easily enter insolvency proceedings under the IBC, successfully exiting through timely resolution has remained a major challenge due to prolonged litigation, procedural delays, and declining asset values.

• The introduction of CIIRP seeks to address these shortcomings by creating a faster and less disruptive insolvency mechanism.

Evolution of India's Insolvency Framework

The Sick Industrial Companies Act (SICA): Debtor-in-Possession Model

Before the enactment of the IBC, insolvency was governed primarily by the Sick Industrial Companies Act (SICA), which followed a debtor-in-possession model. Under this approach, the existing promoters and management continued to control the company during insolvency proceedings.

Although this system intended to facilitate business revival, it was frequently misused. Promoters often delayed resolution, prolonged litigation, and protected their own interests while creditors suffered mounting losses. Consequently, recovery rates remained poor and distressed companies continued to lose value.

The Insolvency and Bankruptcy Code (IBC): Creditor-in-Control Model

To overcome the weaknesses of SICA, the IBC introduced a creditor-in-control framework. Once a company defaulted, the management was replaced by an Insolvency Resolution Professional (IRP), while major decisions were taken by the Committee of Creditors (CoC).

The objective was to ensure time-bound resolution, maximise asset value, improve credit discipline, and strengthen investor confidence. However, despite these reforms, practical implementation has often been affected by judicial delays, appeals, and procedural complexities, causing resolution timelines to extend far beyond the statutory limits.

What is the Creditor-Initiated Insolvency Resolution Process (CIIRP)?

Meaning of CIIRP

The Creditor-Initiated Insolvency Resolution Process (CIIRP) is a newly introduced hybrid insolvency mechanism under the IBC Amendment, 2026, incorporated through Sections 54C to 54P.

Unlike the traditional Corporate Insolvency Resolution Process (CIRP), the existing management continues to operate the company during CIIRP under the supervision of a Resolution Professional.

Objective of CIIRP

The primary objective of CIIRP is to facilitate quick corporate restructuring without disrupting normal business operations. By avoiding unnecessary liquidation, it seeks to preserve enterprise value, protect employment, maximise recoveries for creditors, and maintain confidence in the insolvency framework.

Why Was CIIRP Introduced?

Reducing Value Destruction

Traditional insolvency proceedings frequently result in significant destruction of economic value because companies lose customers, employees, suppliers, and investor confidence during prolonged litigation. CIIRP seeks to minimise these losses by allowing businesses to continue functioning throughout the restructuring process.

Addressing Delays under CIRP

Although the IBC prescribes strict timelines, many cases remain pending for years before the National Company Law Tribunal (NCLT). CIIRP aims to provide a quicker alternative that reduces procedural delays and facilitates faster restructuring.

Response to the Vidarbha Industries Judgment

The introduction of CIIRP also responds to the Supreme Court's judgment in the Vidarbha Industries case.

Earlier, Section 7(5)(a) of the IBC used the word "may," giving the NCLT discretionary authority to admit or reject insolvency applications even after debt and default had been established.

The 2026 Amendment replaces the word "may" with "shall." As a result, once the existence of debt and default is verified through official records, the NCLT is now legally obligated to admit the application. This change significantly reduces judicial discretion and accelerates insolvency proceedings.

Major Features of CIIRP

Hybrid Insolvency Model

CIIRP combines elements of both debtor control and creditor supervision. The company's management continues day-to-day operations while remaining under the oversight of an independent Resolution Professional.

Business Continuity

Unlike conventional insolvency proceedings where management is displaced immediately, CIIRP enables companies to continue functioning during restructuring, thereby preserving operational efficiency and enterprise value.

Faster Resolution

The mechanism seeks to reduce delays, minimise litigation, and facilitate quicker restructuring without forcing financially viable companies into liquidation.

Constitutional and Practical Concerns

Restricted Access to CIIRP

The most controversial aspect of the amendment is that only "notified financial institutions" are permitted to initiate CIIRP.

This creates a new classification even among financial creditors, limiting access for many other legitimate creditors.

Article 14 and Equality Before Law

The restriction raises concerns under Article 14 of the Constitution, which guarantees equality before law.

In the Swiss Ribbons case, the Supreme Court upheld the distinction between financial creditors and operational creditors because both groups possess fundamentally different commercial interests and responsibilities.

However, the new distinction between "notified financial institutions" and other financial creditors appears less convincing.

The government argues that notified institutions possess superior expertise in restructuring distressed companies. However, modern financial markets include numerous sophisticated participants such as Asset Reconstruction Companies (ARCs), Private Equity Funds, Alternative Investment Funds (AIFs), and other institutional investors with comparable restructuring capabilities.

Therefore, the classification may fail the constitutional test of "intelligible differentia" and reasonable nexus under Article 14.

Impact on Smaller Creditors

Marginalisation of Operational Creditors

Operational creditors already occupy a lower position in the repayment hierarchy under the IBC.

Restricting CIIRP initiation rights exclusively to notified institutions further weakens their bargaining position and reduces their influence during restructuring negotiations.

Disadvantage for Smaller Financial Creditors

Smaller financial creditors also lose the opportunity to initiate the quicker CIIRP process.

To safeguard their interests, they may be compelled to initiate the traditional Corporate Insolvency Resolution Process (CIRP), which remains more time-consuming, expensive, and litigation-intensive.

Consequently, the amendment creates unequal treatment within the same class of financial creditors.

International Practices

United States – Chapter 11 Bankruptcy

Under the United States Chapter 11 framework, participation in corporate restructuring depends on the creditor's financial exposure rather than the regulatory category to which the creditor belongs.

Creditors possessing sufficient financial stakes can actively participate in restructuring regardless of their institutional identity.

United Kingdom – Part 26A Restructuring Plans

Similarly, the United Kingdom's Part 26A restructuring framework allows participation based on objective financial criteria instead of regulatory classification.

The emphasis remains on protecting legitimate economic interests rather than favouring particular categories of institutions.

India's Divergence

Compared to international practices, India's restriction of CIIRP initiation rights to only notified financial institutions appears unusual.

Such institutional discrimination may discourage foreign investors, reduce confidence in India's distressed asset market, and complicate Inter-Creditor Agreements (ICAs) by granting disproportionate bargaining power to selected institutions.

Challenges Associated with CIIRP

Constitutional Vulnerability

The institutional classification may be challenged as violating Article 14 due to the absence of a clear and rational basis for differential treatment.

Reduced Inclusiveness

The mechanism excludes several sophisticated creditors despite their financial expertise and substantial economic exposure.

Concentration of Decision-Making

Granting exclusive initiation rights to notified institutions concentrates power in a limited group of creditors, potentially reducing transparency and fairness.

Possible Impact on Investor Confidence

International investors may perceive the insolvency framework as biased, thereby reducing investment interest in India's stressed asset market.

Way Forward

Adopt a Universal CIIRP Framework

Experts recommend replacing the current institutional classification with a Universal CIIRP based on objective financial criteria.

Instead of asking "Who is the creditor?", the law should ask "How much financial exposure does the creditor have?"

Default-Neutral Initiation Rule

Any financial creditor should be allowed to initiate CIIRP provided that creditors representing at least 51% of the total financial debt support the proposal.

Such a threshold would prevent frivolous filings while ensuring broad creditor consensus.

Ensure Constitutional Compliance

Replacing institutional categories with objective financial thresholds would strengthen compliance with Article 14 by ensuring equal treatment of similarly placed creditors.

Conclusion

The introduction of Creditor-Initiated Insolvency Resolution Process (CIIRP) represents an important step towards making India's insolvency framework faster and less disruptive. However, limiting its use to only notified financial institutions undermines both constitutional principles and commercial fairness.

A truly modern insolvency regime should evaluate creditors based on their financial exposure, not their institutional identity. Adopting a Universal CIIRP supported by creditors holding at least 51% of the total financial debt would make the process more inclusive, constitutionally robust, internationally credible, and better aligned with the objectives of the Insolvency and Bankruptcy Code—namely, maximising asset value, promoting business continuity, protecting creditor interests, and strengthening India's investment climate.