Before 2016, a failed Indian company could spend decades dying. Sick companies lingered under the Board for Industrial and Financial Reconstruction, promoters stripped assets while cases crawled, and banks recovered pennies on loans that had long turned bad. The Insolvency and Bankruptcy Code (IBC), enacted in 2016, replaced this chaos with a single ruthless principle: creditors take control, and the company is either revived or buried within a strict deadline. A decade on, it has reshaped Indian credit culture. Here is how it works.

Why the IBC was unavoidable: the NPA mountain

The Code was born of a crisis. By the mid-2010s, India’s public-sector banks were buried under non-performing assets — the “twin balance sheet problem” of overleveraged companies and undercapitalised banks, with stressed assets running into lakhs of crores. The old recovery machinery was a bad joke: the Board for Industrial and Financial Reconstruction (BIFR) became a parking lot where promoters stalled for decades, debt recovery tribunals were clogged, and SARFAESI helped only secured lenders. An RBI asset-quality review in 2015 forced banks to recognise the true scale of bad loans — and recognition without resolution is just despair. The IBC supplied the missing piece: a time-bound, creditor-driven exit mechanism. It is no coincidence that bank balance sheets are dramatically healthier a decade later; the Code is a large part of that cleanup.

The trigger: who can drag a company to the NCLT

The IBC process begins when a company defaults on a debt of 1 crore rupees or more – the threshold that filters out small disputes. Financial creditors (banks, bondholders), operational creditors (suppliers, employees owed dues) and even the company itself can file before the National Company Law Tribunal (NCLT). Once the tribunal admits the case, the consequences are immediate and dramatic: the board of directors is suspended, a resolution professional takes over management, and a moratorium freezes all lawsuits, recovery actions and asset transfers against the company. This “calm period” gives the resolution process a clean shot – no creditor can grab assets while the collective solution is worked out.

The CIRP: 330 days to save or sell

The Corporate Insolvency Resolution Process (CIRP) must conclude within 330 days including litigation – a deadline that was the Code’s revolutionary feature. The resolution professional invites claims from all creditors, verifies them, and constitutes the Committee of Creditors (CoC), where financial creditors vote in proportion to their dues. The CoC then invites resolution plans from prospective buyers – rival companies, private equity funds, asset reconstruction companies – each proposing how much creditors get and how the business continues. Plans need 66 per cent of voting share to pass, and the CoC must pick the plan that maximises value while keeping the company viable. If no plan passes in time, the company goes into liquidation: assets are sold piecemeal and proceeds distributed per a statutory waterfall – secured creditors and workmen first, government dues and unsecured creditors later, shareholders last.

The design philosophy is worth pausing on: the IBC deliberately puts financial creditors in charge, on the theory that those with the most money at stake will maximise recovery. Operational creditors — suppliers, employees — get a voice but not a vote proportional to their pain. This creditor-in-control model is the opposite of America’s Chapter 11, where existing management typically stays in charge (debtor-in-possession) and negotiates a reorganisation. India’s choice reflected its specific disease: promoter-managers who had stripped companies could not be trusted to heal them.

The landmark cases that defined the Code

The IBC’s credibility was built case by case. Essar Steel’s resolution – ArcelorMittal’s 42,000-crore takeover after a Supreme Court battle that upheld financial creditors’ primacy – showed promoters could actually lose their companies. Bhushan Steel’s acquisition by Tata Steel proved marquee assets could find buyers. The DHFL resolution marked the first financial services firm resolved under the Code’s special framework. Each landmark tightened the law: courts clarified that the 330-day deadline is directory rather than mandatory in exceptional cases, that dissenting creditors must receive at least liquidation value, and – crucially – that defaulting promoters are barred from buying back their own companies at a discount (Section 29A). The haircuts – creditors often recover around a third of admitted claims – remain controversial, but recovery beats the near-zero of the old regime.

The haircut debate deserves nuance. Critics call 30–50 per cent recovery a failure; defenders note the alternative was liquidation value — often under 10 per cent — and that the IBC’s real return includes the thousands of crores repaid by promoters who settled before admission to avoid losing control. The behavioural change — borrow knowing default means losing your company — may be worth more than any single recovery statistic.

Impact: how the IBC changed borrower behaviour

• The fear of losing control made promoters repay: thousands of cases settled before admission as debtors paid up to avoid the NCLT.
• Banks recovered far more than under previous mechanisms like SARFAESI or debt recovery tribunals.
• Credit discipline improved – borrowers know default has swift, existential consequences.
• A market for distressed assets emerged, with ARCs and special-situations funds bidding in resolutions.
• Challenges persist: NCLT vacancies and appeals stretch timelines beyond 330 days, and liquidation remains the outcome for many smaller companies.

The timeline slippage is the Code’s most honest problem. The 330-day promise assumed a well-staffed NCLT; the reality of vacancies, adjournments and appellate litigation means many cases run far longer. Successive amendments — pre-packaged resolutions for MSMEs, with cross-border and group-insolvency frameworks still works in progress — keep patching the machinery. The direction is right; the speed is not.

The IBC did not end business failure – no law can – but it ended the Indian tradition of the zombie company. For lenders, borrowers and the economy, that shift from limbo to resolution is the Code’s enduring achievement.

FAQs

Can a defaulting promoter buy back their company?

No. Section 29A bars wilful defaulters and those connected with the default from submitting resolution plans – the “phoenix” problem the old regime suffered from.

What happens to employees in IBC?

Workmen’s dues rank high in the liquidation waterfall, and resolution plans typically must address employee liabilities. Operational creditors including employees can also trigger the process.

Does IBC apply to individuals?

The Code’s personal insolvency provisions for individuals have been notified only partially; the corporate process under the NCLT is the fully operational part.

How is IBC different from the US Chapter 11?

Chapter 11 keeps existing management in control during reorganisation; the IBC suspends the board and hands control to creditors through a resolution professional — a deliberate choice given India’s history of promoter misuse.

Compiled by the Khabar 24h Editorial Desk from publicly available sources.