Development And Evolution Of Insolvency And Bankruptcy Laws In India

Stability and predictability of the legal system is undeniably an essential component of the “Rule of Law” and in its absence, people have great difficulty managing their affairs effectively. The issue attains enormous proportion in the field of commercial law as there is nothing that the corporate enterprises fear more than uncertainty. There is an old management principle according to which “you can’t manage what you cannot predict”, which conversely implies that unless something is predictable, it cannot be managed. Stability and predictability of the regulatory environment and the applicable laws rank high amongst the important variables’ enterprises consider while making investment decisions and hence, these factors have a direct bearing on the ease of doing business in a country[1]. This Article will cover the Development and Evolution of Insolvency and Bankruptcy laws in India.


Since we are a common law country, all our laws are eventually tested with the touchstone of the higher judicial systems of India, namely the High Courts and Supreme Court of India, so that further interpretations are available, and gap and/or ambiguity, if any, in the written law is filled up and the law gets a stable foundation of precedence. Apart from this, the law has also to pass the test of equity and justice on the one hand and non-violation of the fundamental rights of its citizens guaranteed by the constitution on the other. In a very rare and sensitive situation, the court has also to find whether the law is against the basic structure of the constitution.

As far as the introduction of new laws in India is concerned, the Insolvency and Bankruptcy Code, 2016 (Code) is second to none in the discussion, excitement and media interest that it has generated since the time it has been legislated. Its framers professed that it would radically alter the debt restructuring and debt recovery landscape of the country and bring the framework of insolvency resolution on par with developed countries. While it may be too early to gauge whether the Code lives up to its “objects and reasons”, this chapter analyses the backdrop that necessitated the introduction of the Code and the key judicial decisions under the Code, which paint a picture of hope and promise to completely transform the insolvency resolution regime in India in a time bound manner.

The Insolvency and Bankruptcy Code (“the Code”) is a new legislation to manage the Insolvency resolution process for corporate persons, individuals, and partnership firms. The structure, functioning and even some of the provisions of the Code are of such kinds that have not existed before in any form and hence difficult to draw a pari materia with any existing provision of law.

In case of any new enactment, the law evolves, and jurisprudence is settled over time. What is generally expected is that evolution of the law will relate to certain imminent clarifications to streamline the procedure and settle existing legal principles as applicable to the new enactment. However, in case of the IBC 2016, while the Code is a comprehensive piece of legislation wherein great effort has gone to detail every possible situation that may arise; the situation since its enactment is more like the goalposts are being shifted way too frequently, thereby, causing a lot of uncertainty and delay in what is proposed to be a time bound and simple process[2].

Prior to the Code, India did not have a consolidated statute governing incident of insolvency and bankruptcy of various entities. For example, the provisions relating to the insolvency of corporations were scattered amongst laws as diverse as the Companies Act, 1956 (Companies Act), the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDB Act), the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the much-reviled Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). Similarly, there were two statutes, namely, the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909 governing instances of individual bankruptcy[3].

One downside to having multiple statutes was that on one hand, there was an overlap/contradiction in some provisions and on the other hand, the legal proceedings initiated thereunder would sometimes run in parallel before several different forums, which often led to multiple and contradictory orders in respect of the same entity. To further aggravate the situation, the entire process of recovery, debt restructuring, and liquidation remained extremely susceptible to dilatory tactics to the extent that on an average, debt restructuring, and liquidation took almost 4.3 years in India[4].

The laws like SICA, it was possible for a corporate debtor to avoid recovery proceedings/ liquidation indefinitely by seeking protection under its provisions prohibiting claims against sick companies.

Now, the object behind SICA was revival of sick companies. But not too many revivals took place. But what happened in the process was that a protective wall was created under SICA that once you enter the BIFR, nobody can recover money from you. So that non-performing investment became more non-performing because the companies were not being revived and the banks were also unable to pursue any demand as far as those sick companies were concerned

However, SICA runs contrary to this whole concept of exit that if a particular management is not in a position to run a company, then instead of the company closing down under this management, a more liquid and a professional management must come and then save this company. That is the whole object. And if nobody can save it, rather than allowing it to be squandered, the assets must be distributed – as the Joint Committee has decided – in accordance with the waterfall mechanism which they have created.

It was widely felt that that the previous framework for insolvency and bankruptcy in India was inadequate, ineffective, and resulted in undue delays in resolution. One of the objects of bringing in the Code therefore was to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner.

To overcome the infirmities of the previous insolvency resolution framework, the Banking Law Reforms Committee (BLRC) was constituted in October 2014 under the chairmanship of Mr. T.K. Viswanathan. In November 2015, the BLRC came out with its report recommending drastic changes to the law relating to insolvency and bankruptcy (BLRC Report). The BLRC Report recommended a complete institutional overhaul, inter alia, proposing the constitution of a regulator (which eventually became the Insolvency and Bankruptcy Board of India), information utilities, insolvency professional agencies and insolvency professionals.

Although the complete overhaul of the system and the implementation of the recommendations of the BLRC Report appeared to be a tall order, the government’s commitment to the cause can be gauged from the fact that the Code was brought into effect expeditiously, and its provisions were notified from time-to-time, and it was implemented in December 2016. Since its implementation, India has dedicated tribunals, the National Company Law Tribunals (Adjudicating Authority) with twelve benches across the country, the National Company Law Appellate Tribunal (Appellate Authority), a fully functional regulator (viz., the Insolvency and Bankruptcy Board of India (IBBI)), insolvency professional agencies and several highly-qualified insolvency professionals.

Landmark Judgements

There have been instances that lead to the shaping the laws and Development and Evolution of Insolvency and Bankruptcy laws in India.

Innoventive v. ICICI[5]

The Supreme Court dealt extensively with the nature of insolvency applications filed under Section 7 of the Code and also with the issue of repugnancy between the Code and the MRU Act. The judgment of the Supreme Court also touches upon other key aspects of the Code, thereby boosting the confidence of all the stakeholders.

Mobilox v. Kirusa[6]

In this case, the Supreme Court interpreted the term “dispute” for the purposes of Section 8(2) of the Code. This decision came against the backdrop of multiple contradictory decisions interpreting “disputes” by various benches of the Adjudicating Authority.

Pronouncing on the interpretation of “dispute”, the Supreme Court held that keeping in mind the legislative intent of the Code, the “and” in Section 8(2) of the Code ought to be read as ‘or’ and therefore the definition of dispute therein was inclusive and could not be restricted to only pending suits and arbitrations.

Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited & Ors.[7]

The Supreme Court took the view that there could be weighty, valid and justifiable reasons for not being able to remove the defects within seven days and the said stipulation was directory in nature, and that an insolvency application could be entertained even when the applicant had overshot the seven day period prescription, provided that the petitioner was able to show sufficient cause for the delay.

Essar Steel India Limited v. Reserve Bank of India[8]

The RBI directive and the Gujarat High Court’s verdict in a case wherein it refused to intervene and stay the proceedings against Essar, eventually paved the way for the initiation of insolvency resolutions against other large companies, the most notable of which are Jaypee Infratech Limited and Amrapali Infrastructure Limited.

Various NCLT benches across the country have taken different views on maintainability of insolvency process during pendency of winding up proceedings before Hon’ble High Courts. So much so that now a special bench has been constituted by the President of NCLT to decide on the issue. Similarly, various benches and the Appellate Tribunal have taken contrary views on several issues including Bankers Book of Evidence Certificate, Bankers Certificate regarding non-payment of debt in case of petition by operational creditor, and relaxation of 7 days period to cure defects[9].

In Jaypee Infratech Ltd, the NCLT bench at Allahabad admitted the insolvency petition against Jaypee Infratech which, having several businesses, is a builder of residential apartments and had accepted deposits from individuals towards flats proposed to be constructed. However, in terms of priority for settling the claims, the flat buyers stood at the bottom of the pyramid i.e. below the workmen, secured creditors, statutory dues, employees, and operational creditors.


While Indian courts have sometimes drawn criticism for judgments that appear to defeat the legislative intent behind certain statutes (a case in point being several Supreme Court decisions in the early years of enactment of the Arbitration and Conciliation Act, 1996), the first round of case law suggests an approach that is conscious of the legislative intent behind the Code, and an intention to not allow debtors to scuttle or delay the insolvency resolution process. Understanding the time-bound nature in which the Code functions, courts have shown great restraint and have ensured that proceedings before them do not become susceptible to dilatory litigation tactics that are the curse of Indian courts. Even in cases where the corporate debtors have approached the courts for relief that would result in stalling insolvency proceedings, as in Innoventive v. ICICI and Essar v. RBI, the courts have rightly refused to intervene and stay insolvency proceedings[10].


What Is The Definition Of Bankruptcy?

Ans: Bankruptcy refers to a federal court procedure that allows debtors to catch up on their debts by having some of them discharged and others repaid, depending on the type of bankruptcy.

What Is The Insolvency And Bankruptcy Code?

Ans: The Insolvency and Bankruptcy Code (“the Code”) is a new legislation to manage the Insolvency resolution process for corporate persons, individuals, and partnership firms.

What Duties And Potential Liabilities Should The Directors/Managers Have Regard To When Managing A Company In Financial Difficulties?

Ans: The directors, managers and all the key managerial personnel of the Corporate Debtor are required to act honestly, without negligence and in good faith in the bona fide best interest of the company.  Directors are further expected to make proper use of their powers, not to fetter their discretion for any reason whatsoever.

Which Other Stakeholders May Influence The Company’s Situation? 

Ans : The provisions of the Code empower any creditor of a Corporate Debtor, irrespective of it being a Financial or Operational Creditor or secured or unsecured creditor, to file an application before the AA for initiating the Corporate Insolvency Resolution Process against the Corporate Debtor in the event of there being a default by the Corporate Debtor in making payment of the dues for an amount of Rs. 1.00 Lac or more.

What Formal Rescue Procedures Are Available In Your Jurisdiction To Restructure The Liabilities Of Distressed Companies?

Ans : The formal procedure for restructuring encompasses, within its ambit, schemes of reconstruction, takeovers, mergers, demergers, transfer of undertakings and restructuring of debts as provided in Section 230–240 of the Companies Act, 2013 by way of which the liabilities of the distressed companies can be restructured. 




[4] World Bank Report, 2016

[5]2017 SCC Online SC 1154,

[6] Civil Appeal No. 8400 of 2017

[7] 2017 Tax Pub (CL) 0688



[10] ibid

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