Reforming the Reform: Why India's Insolvency Regime Needs a 'Universal' Overhaul
The 2026 amendment to the Insolvency and Bankruptcy Code introduced a faster resolution process, but by restricting it to a select few creditors, it has raised fundamental questions of fairness and economic efficiency.
The Pre-requisite
To understand the debate around the 2026 amendment to India's insolvency law, one must first grasp the foundational concepts, history, and institutions that govern corporate bankruptcy in the country. This section provides that essential context.
KEY TERMS
- Insolvency and Bankruptcy Code (IBC), 2016 — India's comprehensive law consolidating the legal framework for the timely resolution of insolvency for corporations, partnership firms, and individuals.
- Corporate Insolvency Resolution Process (CIRP) — The primary, creditor-in-control process under the IBC where an external Resolution Professional takes over the management of a defaulting company to find a resolution plan.
- Creditor-Initiated Insolvency Resolution Process (CIIRP) — A new, hybrid resolution mechanism introduced by the IBC (Amendment) Act, 2026, which allows certain creditors to initiate a process where the existing management (debtor-in-possession) remains in control under supervision.
- Financial Creditor — An entity to whom a financial debt is owed, such as a bank or financial institution, which typically has a claim on the future value of the company.
BACKGROUND & TIMELINE
India's approach to corporate distress has evolved significantly. For decades, the primary law was the Sick Industrial Companies Act (SICA), 1985, which established a 'debtor-in-possession' model. The SICA regime was widely criticized as inefficient, plagued by delays and misuse by promoters who could indefinitely stall loan recovery. This led to what economists termed the 'Chakravyuha Challenge'—easy entry for businesses but formidable barriers to exit.
A paradigm shift occurred with the enactment of the Insolvency and Bankruptcy Code (IBC) on May 28, 2016. The IBC moved to a 'creditor-in-control' model, prioritising time-bound resolution to maximise asset value. Its constitutionality, including the crucial distinction between financial and operational creditors, was upheld by the Supreme Court in its Swiss Ribbons Pvt. Ltd. vs. Union of India (2019) judgment.
However, a 2022 Supreme Court ruling in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. created a significant hurdle. The court interpreted the word "may" in Section 7(5)(a) of the IBC to mean that the National Company Law Tribunal (NCLT) had discretionary power to reject an insolvency application even if debt and default were proven. This diluted the IBC's core principle of certainty. The IBC (Amendment) Act, 2026, is a direct legislative response to this judgment and other emerging challenges.
INSTITUTIONAL FRAMEWORK
The IBC ecosystem is managed by a set of specialised institutions:
- Ministry of Corporate Affairs (MCA): The nodal ministry of the Government of India responsible for the administration of the IBC and corporate law.
- Insolvency and Bankruptcy Board of India (IBBI): Established on October 1, 2016, the IBBI is the primary regulator. It oversees the functioning of Insolvency Professionals, Insolvency Professional Agencies, and Information Utilities.
- National Company Law Tribunal (NCLT): The adjudicating authority for all insolvency proceedings concerning companies and Limited Liability Partnerships (LLPs) under the IBC.
- National Company Law Appellate Tribunal (NCLAT): The appellate authority that hears appeals against the orders of the NCLT.
The Main Explanatory
The Insolvency and Bankruptcy Code (Amendment) Act, 2026, represents the most significant evolution of India's insolvency framework since its inception a decade ago. While it aims to address procedural delays and introduce a more flexible resolution tool, a core aspect of the amendment—its exclusivity—has ignited a debate on fairness, constitutional validity, and economic prudence.
### What is the core change in the 2026 IBC Amendment?
The amendment introduces two fundamental changes. First, it creates a new, less disruptive resolution pathway called the Creditor-Initiated Insolvency Resolution Process (CIIRP), codified in Sections 54C to 54P of the amended Code. Unlike the traditional CIRP where a company's board is suspended, the CIIRP is a hybrid 'debtor-in-possession' model. It allows existing management to remain in charge under the supervision of a resolution specialist appointed by the initiating creditor. The stated goal is to provide a swift restructuring tool for companies facing temporary liquidity issues without the disruption of a full CIRP.
Second, the amendment legislatively overturns the Supreme Court's 2022 ruling in Vidarbha Industries. It amends Section 7(5)(a) of the IBC, replacing the word "may" with "shall". This makes it mandatory for the National Company Law Tribunal (NCLT) to admit an insolvency application if debt and default are proven through the records of an Information Utility. This change removes the NCLT's discretion, which had become a source of litigation and delay, thereby restoring certainty to the admission process.
### Why has the CIIRP's initiation mechanism become controversial?
The controversy lies not in the CIIRP's existence, but in who is permitted to use it. The 2026 amendment restricts the right to initiate a CIIRP exclusively to "notified financial institutions". This creates a privileged sub-category within the broader class of financial creditors, which includes banks, non-banking financial companies, asset reconstruction companies, and investment funds. All other financial creditors, along with operational creditors, are barred from accessing this less disruptive resolution process.
This legislative choice has raised serious constitutional concerns. Critics argue that this sub-classification is arbitrary and violates the principle of equality enshrined in Article 14 of the Constitution. The Supreme Court in Swiss Ribbons (2019) upheld the distinction between financial and operational creditors based on an "intelligible differentia." It reasoned that financial creditors assess a firm's overall viability, unlike operational creditors who are concerned with specific transactions. However, legal analysis suggests a similar justification for sub-dividing financial creditors is absent, risking that the provision may be struck down by the courts.
### What is the government's rationale and what are the counterarguments?
The government's rationale, reflected in the amendment's Statement of Objects and Reasons, is that certain large, regulated financial institutions possess superior expertise and a systemic role justifying their exclusive access. The policy assumes these "notified" institutions have the sophisticated knowledge required to oversee a debtor-in-possession restructuring effectively, thereby preventing misuse of this lighter-touch mechanism.
This rationale is challenged as disconnected from modern financial realities. According to legal scholars Vinay Juneja and Shweta Bhuyan of Maharashtra National Law University Mumbai, the financial ecosystem now includes sophisticated investors like special situation funds and foreign portfolio investors with deep restructuring expertise who may be excluded. Critics argue this structure disenfranchises other creditors by concentrating power with large institutions, which can skew negotiations in workout plans. It also creates economic inefficiency by forcing non-notified creditors to trigger the more value-destructive CIRP. Ultimately, the law provides no clear criteria for why a notified institution is better equipped for resolution, making the distinction appear arbitrary.
### How does India's approach compare with international practices?
India's decision to restrict initiation rights based on the creditor's regulatory identity is an outlier in global insolvency law. Most mature jurisdictions have moved towards more inclusive and objective criteria for initiating restructuring.
For instance, the well-established Chapter 11 of the U.S. Bankruptcy Code provides a debtor-in-possession framework that can be initiated by the debtor or a wide range of creditors. Access is determined by the company's financial condition, not the identity of the petitioner. Similarly, the United Kingdom's Part 26A restructuring plan, introduced in 2020, allows a company, its creditors, or its members to propose a plan. The focus in these jurisdictions is on financial distress and plan viability, allowing broad stakeholder participation.
As some analyses have pointed out, India's restrictive approach risks deterring foreign investment. International investors may perceive the Indian market as having an intrinsic bias against their asset classes, creating an unlevel playing field that undermines the predictability and fairness of the insolvency regime.
The Way Forward
Why does this matter right now?
The IBC (Amendment) Act, 2026, is a critical juncture for India's decade-old economic reform. Its implementation will directly influence credit discipline, the cost of capital, and the country's 'ease of doing business' ranking. The controversy surrounding the CIIRP's restrictive initiation clause is not merely academic; it is poised to trigger a wave of litigation challenging its constitutionality under Article 14. This legal uncertainty could stall the very process the amendment seeks to expedite, leaving creditors and distressed companies in limbo.
What is the likely trajectory?
In the next one to two years, the primary battleground will be the judiciary, with petitions likely to be filed before the Supreme Court testing the "notified financial institutions" clause. The government's list of notified institutions, expected by the end of 2026, will be a key political and economic signal. Concurrently, the Insolvency and Bankruptcy Board of India (IBBI) is tasked with framing detailed regulations for the CIIRP. A formal review of the amendment's performance by the Parliamentary Standing Committee on Finance is anticipated by 2029 to assess its impact on resolution timelines and recovery rates.
What are the governance implications?
The debate over the CIIRP encapsulates a core tension in Indian policymaking: the pursuit of efficiency versus the principles of equity and fairness. While the government's intent to create a swift, expert-led process is clear, the chosen path risks creating a tiered system of corporate justice. An alternative, proposed by legal experts, is a "universal CIIRP" with a "default-neutral initiation rule." This model would replace regulatory status with a financial threshold, allowing any creditor or group of creditors holding a significant stake—for example, 51% of financial debt—to initiate the process. Such a system would be more democratic, constitutionally robust, and economically inclusive.
Ultimately, India's insolvency journey is one of continuous evolution. The 2026 amendment's introduction of debtor-in-possession elements signals a maturation of the framework. However, to build a truly world-class insolvency regime, the reform itself must be reformed to ensure that the path to resolution is open to all who have a stake, not just a privileged few. A fair process is not an impediment to efficiency; it is its most sustainable foundation.