Juris Prime Law Services | View firm profile
By Midakanti Sai Keerthana, Intern
Introduction:
The Insolvency and Bankruptcy Code, 2016 (IBC) is a single law that lays down clear, time-bound rules for how companies, partnerships and even individuals in India can deal with financial stress (When they can’t pay debts). It replaced the earlier system where the person who owed money (debtor) stayed in control, with a creditor-in-control system – meaning lenders/creditors decide the company’s fate during insolvency. The IBC, 2016, aims to address the problems of distressed assets in a time-bound manner by maximising the value of assets and balancing the interests of the creditors. But the journey from paper to practice wasn’t smooth. The promise of speed and predictability was diluted by repeated litigation, inconsistent judicial interpretations, and procedural bottlenecks. Instead of a creditor-driven framework, delays and uncertainty began creeping in. The wide judicial discretion of NCLT in admission and rejection of CIRP, even when both the debt and default are established, has added to the prolonged delay. The discretion was expanded by the Vidarbha Industries Judgment, allowing the NCLT to consider matters other than the debt and default in deciding the CIRP applications, which, in a way, enabled the debtors to delay the insolvency proceedings through unnecessary litigation, diluting the code’s objective.
The IBC Amendment Bill, 2025, introduced in the Lok Sabha on 12th August 2025, aims to resolve these ambiguities, streamline and expedite the resolution in a time-bound manner, reducing any frivolous and vexatious litigation and align the Indian insolvency with the International best practices. The bill aims to restore the IBC’s original goal of efficient, transparent, and time-bound resolution of insolvency.
Pre-Amendment Challenges in Insolvency Initiation:
Prior to the 2025 amendment, IBC 2016 was hampered by frequent delays in case admission, conflicting judicial rulings, and heavy backlogs at NCLT, all of which led to unpredictable and slow insolvency resolutions.
The code originally required NCLT to admit a financial creditor’s application once debt and default were proven. However, the Supreme Court’s judicial interpretations in the case of Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. vested excessive judicial discretion in the
NCLT regarding the admission or rejection of the CIRP application, even if a default was proven. This meant companies could delay insolvency proceedings by showing possible future inflows or awards. The mechanical, time-bound admission process turned into a subjective evaluation, undermining creditor rights.
Section 7(5)(a) of the Code has used the word “may” instead of “shall”, which provides NCLT with the discretion to reject an application even if the twin conditional requirement of a debt and default on the part of the corporate debtor (CD) is established by the financial creditor (FC).
Though the Court has specifically held in this judgement that “Even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily”.
In the Rainbow Paper case – Upsetting the Waterfall
Section 53 of the IBC clearly placed secured financial creditors at the top of the repayment waterfall, while government dues ranked much lower. But in State Tax Office vs Rainbow Papers Ltd., the Supreme Court held that government tax claims could be treated as “secured” if state laws created a first charge. This elevated statutory dues to the level of secured banks, creating massive uncertainty for lenders and threatening credit flow to businesses.
Videocon Group Insolvency – No Framework for Group Resolution
The IBC did not have well-defined provisions and processes for dealing with complicated insolvency situations, like group insolvency and cross-border insolvency. Large business groups often operate through multiple interlinked entities. In the Videocon case, NCLT had to consolidate 13 companies under one process for the resolution to work. While practical, this was done in the absence of a framework for group insolvency. This legal vacuum raised concerns for investors and buyers about the predictability of outcomes.