Govt proposes IBC overhaul, shift of power from courtrooms to boardrooms

The Bill outlines a creditor-led, largely out-of-court insolvency process for quick rescue, faster tribunal timelines, a new framework for group insolvencies and cross-border bankruptcies, and clearer rules on the priority of government dues. It also marks a big departure from the current regime by allowing management of bankrupt companies to continue running day-to-day operations under the watch of a resolution professional.

At present, insolvency cases that are meant to be admitted within 14 days take an average 434 days, eroding value for lenders and shareholders.

“The proposed amendments aim to reduce delays, maximise value for all stakeholders, and improve governance," Sitharaman said in a statement tabled along with the Bill.

The Bill empowers rule maker Insolvency and Bankruptcy Board of India (IBBI) to roll out a creditor-led insolvency resolution regime, under which most of the negotiations involving creditors, existing shareholders and new investors will happen out of court. A final corporate rescue plan will be placed before the tribunal for its seal of approval.

The eligibility thresholds will be notified once the Bill is passed. Select financial institutions can initiate insolvency outside court, while bankrupt businesses can continue to manage their affairs with oversight from a resolution professional who would attend board meetings and would have veto powers. This is a big departure from the current regime under which defaulting businesses lose management control as soon as they are admitted into insolvency.

NCLT will approve the final resolution plan in the creditor-led resolution scheme in the same way as the existing framework.

Moving the needle

The Bill comes as a game changer for the insolvency framework, said Anoop Rawat, national practice head for insolvency and restructuring at law firm Shardul Amarchand Mangaldas & Co.

“The proposed amendments introduce more certainty to admission of cases in NCLT and seek to settle the confusion on the status of statutory dues," said Rawat. “As per the amendments proposed, statutory dues such as taxes, fees and penalties in the case of insolvent companies will rank below the dues owed to secured creditors who have contractual security interests, in the waterfall mechanism."

This seeks to clear the confusion arising from a Supreme Court ruling in 2022 in a dispute between Gujarat state tax authorities and Rainbow Papers Ltd. that the state is a secured creditor under the Gujarat VAT Act.

That ruling suggested that a security interest on the assets of a company can be created by mere operation of a statute. The Bill clarifies that security interest can exist only where there is a right or claim to a property based on an agreement by two or more parties, not merely by operation of any law.

Also, as per the proposed amendments, NCLT has to decide on applications for initiation of insolvency resolution within 14 days and record reasons if delayed, explained Rawat.

The proposed amendments say bankruptcy petitions by the financial creditors should be admitted if a default exists and no other grounds shall be considered for deciding on such an application.

Besides, once an application is admitted, the resolution professional with approval of 90% of the committee of creditors (CoC) can file for withdrawal with NCLT, and no withdrawal is permissible after admission till the constitution of the CoC, explained Rawat.

The changes are expected to reduce timelines for admitting applications related to financial debt, a government official said on condition of not being named.

Group insolvencies

The official added that a new chapter empowering the central government to create rules for coordinated or consolidated insolvency proceedings for group companies to align with international best practices has been included in the Bill.

Currently, the IBC handles each company’s insolvency separately, even when group firms fail together—leading to duplicated work, higher costs, and lower recovery values.

Cross-border insolvencies

The existing cross-border insolvency framework under IBC is limited to bilateral agreements, often resulting in delays and inefficiencies. To address these challenges, a new section is proposed, empowering the Central government to prescribe rules for managing cross-border insolvency cases and to designate a dedicated NCLT Bench for handling such proceedings. This is expected to ensure a more streamlined and predictable process, the government official cited earlier said.

“By letting banks tackle group insolvencies in one go, chase assets overseas through cross-border provisions, and close deals faster with pre-packs for bigger corporates, the Bill shifts the game from courtroom marathons to boardroom negotiations," said Sonam Chandwani, managing partner at KS Legal & Associates.