Pod Insights Finshots Daily The Insolvency and Bankruptcy Code 2.0 explained About this episode In today’s episode on 17th April, we oversimplify the new amendments to the Insolvency and Bankruptcy Code (IBC). But just a heads up before we dive in. This is one of those stories that’s going to be a long read.
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Transcript 0:01 Speaker 00 Hello folks, you're listening to Finchart's Daily and in today's episode, we oversimplify the new amendments to the Insolvency and Bankruptcy Code, that is IBC. But just a small heads up, this might be a little longer podcast than the normal ones.
0:17 Speaker 00 Also, before we head to the story, here's a quick side note from Team Ditto. This weekend, we're hosting a free two-day insurance masterclass that helps you build real financial security by understanding health and life insurance the right way. You can save your spot for free by heading to the link in the description and saving your spot. Alright, let's now head to today's story. Before 2016, India's insolvency system was a bit of a nightmare. There were multiple laws dealing with bankruptcy. Personal insolvency was governed by two old laws. The Presidency Towns Insolvency Act of 1909 for cities like Mumbai, Chennai and Kolkata, and the Provincial Insolvency Act of 1920 for the rest of India.
0:59 Speaker 00 These explained how individuals could be declared insolvent and how their assets would be handled. But they didn't apply to companies. For companies, there was SARF A E S I or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest, which allowed banks to seize assets without court involvement, or the Companies Act and the SIC Industrial Companies Act, SAICA, which dealt with corporate insolvency. But the problem was that firstly, these laws were all over the place and often misused to delay repayments. There were no strict timelines and recoveries were low. Secondly, they didn't solve the broader problem of resolving stressed companies. To give you a quick example, let's talk about JP Group.
1:43 Speaker 00 You might know it for housing, developments, cement, the Yamuna Expressway, and even the Buddha International Circuit that hosted India's first Formula One Grand Prix. But over the time, the group had become known just as much for its debt problem as for its projects, especially in JP InfraTech and the wider group. It had borrowed too much too fast for too many projects at the same time, especially in real estate and infrastructure. So when cash flows slowed, the debt burden became unmanageable. Same time, thousands of home buyers were waiting for flats, banks were chasing repayments, and companies' assets were tied up across projects. There was no single easy recovery path. So, cases like JP's showed how messy debt recovery had become with no efficient way to resolve defaults quickly.
2:26 Speaker 00 Which is why in 2016, the government introduced the Insolvency and Bankruptcy Code. Simply put, insolvency is when you can't pay your debts and bankruptcy is the legal process to deal with it. And the IBC 2016 dealt with this fairly well. Earlier, company owners stayed in charge even after defaulting. But now, creditors or lenders had control over the process. There were strict timelines to resolve cases and fewer delays from endless litigation. The proof is in the pudding. Over the last decade, over 3.5 lakh crore rupees of distressed debt has been resolved under the IBC. Bank non-performing assets have dropped from double digits to below 3%. And a recent IIM study also suggests that companies coming out of the IBC process
3:10 Speaker 00 had better operating profit margins and created more jobs than similar struggling companies. But there were a few things that weren't so great about the IBC 2016. For instance, some parts of the code weren't clear, so courts had to step in, adding delays to what meant was to be a straightforward, rule-based process. At the same time, new buyers who had fairly acquired stressed companies were being held responsible for the past wrongdoings of the old promoters they had replaced. And one of the biggest issues was that resolution timelines, which were meant to cap at a max of 3.30 days, were often stretching beyond 600. Obviously, the government had to do something about it. And after a decade of observing how the IBC 2016 worked and where it fell short, it has now introduced IBC 2.0, or the Amendment Act of 2026,
3:53 Speaker 00 which received the president's assent just last week. And it brings some changes that most observers are applauding. Now, the new code has 12 key amendments, but we'll quickly walk through the most important ones. To begin with, it removes the ambiguity relating to multiple corporate insolvency resolution process applications against the same company. Think of this change as fixing the start date for insolvency when there's a crowd of petitions. Earlier, several creditors Or even the company itself filed different petitions at different times. There was ambiguity about which filing date should be treated as the starting point. Let's say a creditor files a strong petition against a company in Jan. Months later, the company itself files another petition in April.
4:35 Speaker 00 With multiple petitions like this, everyone could start arguing over which is a real date of initiation. Especially when looking back at suspect transactions. Say dubious deal is done in Feb or March, which could get ignored if April is treated as the initiation date instead of Jan. This also made room for confusion or delay on when the moratorium and other consequences truly began. Creating uncertainty and possibly weakening creditor rights. But the new code makes it clear that if multiple applications are filed against a company. The start date will be the one filed first, not whichever one is ultimately admitted or convenient to rely on later. So, no one, especially those trying to delay the insolvency resolution process.
5:16 Speaker 00 Can reset the clock by filing fresh petitions after the first one goes in. Next, the look back period has been extended to two years before the insolvency filing. Earlier, this wasn't clearly defined, though many interpretations assumed it was about one year. A look back period is simply the time window where the insolvency process can go back and check past deals to see if anything unfair happened. It's like reviewing what the company did just before things went wrong. For instance, if a company sold a valuable asset cheaply to a related party. Paid one lender ahead of others or entered into a strange deal just before insolvency. Those transactions can be examined if they fall within this period. The idea is to stop owners or insiders from emptying the company before creditors get to it.
5:59 Speaker 00 Without a look back period, questionable transfers made just before insolvency could be hard to challenge. While extending it helps creditors recover more value from such transactions. It also makes it harder for promoters to clean up the company just before filing and leave lenders and suppliers holding the bag. Third, a very important change and one that observers are applauding. Is the introduction of CIIRP or the creditor initiated insolvency resolution process. This is a new idea where certain financial creditors like banks or financial. Institutions can start a structured insolvency process in a more controlled way without fully depending on the standard NCLT heavy CIRP. That is National Company Law Tribunal Heavy CIRP.
6:42 Speaker 00 To give you some context, under the IBC 2016, a creditor had to file a CIRP case, waiting for it to be admitted and then follow a court, which is NCLT driven process. CIRP changes this by allowing a group of financial creditors to start resolving the issues themselves, mostly outside court, while the company's management stays in place for the time being, under supervision by a resolution professional. If it works, the process leads to a resolution plan within a shorter timeline. If it fails or gets stuck, it can be shifted into the normal CIRP. The idea is to fix problems earlier and at a lower cost, since a full CIRP can be slow and expensive, especially when the business is still viable but just needs quick debt restructuring.
7:25 Speaker 00 And then finally, there are a few smaller but equally important changes to IBC. One is that the government dues will not be treated as secured creditor claims just because the government says so. A secured creditor is someone who has collateral like land, machinery or a building, and these lenders usually get priority in repayment. But a Supreme Court ruling in the Rainbow Papers case changed this. In this case, Gujarat's tax department argued that its unpaid dues should be treated like secured debt because tax law gave it a first charge on the company's property. The court agreed, making government dues seem much more powerful in insolvency than expected. But it also created concern because it disrupted the usual repayment order or the waterfall mechanism, as the court calls it.
8:09 Speaker 00 Typically, payments go first to pay off insolvency costs, then workmen and secured creditors, followed by employees, unsecured lenders, government dues and others. Shareholders are paid last if anything is left. Now imagine what happens if government dues can jump the skew. It breaks that order, right? So, the new IBC fixes this by making it clear that the secured creditors keep their priority and government dues don't automatically move ahead. Another important change is about how when a company can back out of winding up. Earlier, once an insolvency case was admitted, it could only be Drawn if ninety percent of creditors agree, which made exit very difficult. And in voluntary liquidation, that is when a company chose to shut down, there was no option to reverse the decision at all. The twenty twenty six amendment now allows reversal in certain cases.
8:53 Speaker 00 For example, imagine ABC textiles decides to shut down because the business seems unwiable. A few months later, it gets a big export order and wants to restart. Under the new code, it may be able to reverse the liquidation and resume operations if shareholders and creditors agree that is. But take another case of X Y Z infra, which is already N C I R P. It waits until creditors form the committee of creditors, which is the main decision-making group. And bids to take over or resolve the company are invited and then says, we've settled this matter, let's withdraw the case. Now that kind of late withdrawal isn't allowed because the process has already moved too far. Look, the idea is simple. A healthy company should be able to reverse a shutdown if things improve.
9:35 Speaker 00 But a stressed company shouldn't be allowed to start insolvency, let others invest their time and effort and then pull out at the last minute. Finally, the new code clarifies penalties for baseless or malicious filings. See, sometimes insolvency cases are filed not for genuine resolution but to pressure, harass, delay or gain leverage. Earlier, the I B C twenty sixteen recognized this but didn't specify a clear penalty. The new code now sets fines ranging from one lakh to two crore rupees. This is important because once an insolvency case begins, it can freeze actions, create pressure and disrupt control of the business, making it an attractive tool for misuse. For instance, an angry supplier could file an insolvency petition just to pressure a company even if the claim isn't strong. This not only harms the company but also wastes the tribunal's time.
10:18 Speaker 00 The amendment aims to prevent such bad faith filings and protect genuinely distressed firms from tactical harassment. Wow, that was quite an overview. And you may have noticed one common theme across most of these amendments. The new code gives much stronger powers to creditors. And while we've explained why that can be good, there are also few concerns that can't be overlooked. The main concern is that stronger creditor power can also mean less room for debtor rehabilitation if the process becomes too rigid. For example, if the timelines become too strict. Weaker but potentially viable businesses may be pushed into insolvency faster than before. Now that's good for speed but it can be harsh if the stress is temporary and could have been resolved outside formal insolvency. Another issue is implementation.
11:02 Speaker 00 The law may look elegant on paper but the I B C has repeatedly shown that outcomes depend on how tribunals, resolution professionals, creditors and courts actually apply the rules. So new frameworks like C I I R P will only work well if everyone involved handles them without creating fresh delays. So yes, while it's true that the I B C has become more usable in the real world, it may also be less forgiving and perhaps even a bit brutal for companies that still had a real chance to recover with a slower, more flexible approach. And we'll have to wait and see whether this trade off works in favor of most, even if you get sacrificed along the way and whether it ultimately does better than its predecessor. All right, folks, I'll see you in the next one.
11:46 Speaker 00 Thank you for listening to today's episode. And if you want to share your feedback or suggestions, do drop us an email to [email protected] . Until next time.
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