Towards a Fair, Efficient Insolvency Regime: Reforming the IBC through Universal CIIRP

After Reading This Article You Can Solve This UPSC Mains Model Question:

The Insolvency and Bankruptcy Code (Amendment), 2026 seeks to balance business continuity with creditor recovery through the Creditor-Initiated Insolvency Resolution Process (CIIRP). Discuss its significance and associated challenges. 15 Marks (GS-3, Economy)

Context

• India’s insolvency regime has gradually shifted from a debtor-centric approach to a creditor-driven framework under the IBC. However, persistent delays and value erosion in insolvency proceedings highlighted the need for a less disruptive restructuring mechanism.
• In response, the IBC (Amendment), 2026 introduced Creditor-Initiated Insolvency Resolution Process (CIIRP), aiming to combine speedy resolution with preservation of enterprise value.

Introduction

The IBC (Amendment), 2026 introduced the Creditor-Initiated Insolvency Resolution Process (CIIRP) to address delays and value erosion in insolvency proceedings. As a hybrid model combining debtor-in-possession and creditor-in-control features, it aims to ensure faster resolution and business continuity. However, restricting its initiation to notified financial institutions has raised concerns over fairness and inclusivity.

What is CIIRP and its Legislative Basis?

What is CIIRP?

• CIIRP is a hybrid insolvency mechanism that allows existing management to continue operations under the supervision of a resolution professional.
• It aims to resolve financial distress without causing the value destruction associated with liquidation.
• The mechanism focuses on restructuring rather than immediate insolvency proceedings.

Legislative Basis

• The 2026 Amendment inserted Sections 54C to 54P into the IBC to establish CIIRP.
• The amendment replaced the word “may” with “shall” in Section 7(5)(a), limiting NCLT discretion in admitting insolvency applications.
• It was introduced partly in response to the Supreme Court’s interpretation in the Vidarbha Industries case.
• Only notified financial institutions are currently empowered to initiate the CIIRP process.

Significance of CIIRP

1. Preservation of Business Value

• It allows financially distressed but viable firms to continue operations during restructuring.
• This prevents value erosion and preserves productive assets, market reputation, and business relationships.

2. Faster Resolution

• CIIRP reduces procedural complexities and limits excessive judicial intervention.
• Faster resolution helps prevent deterioration of assets and improves recovery prospects for creditors.

3. Employment Protection

• By prioritising restructuring over liquidation, CIIRP helps retain jobs and livelihoods.
• It also protects supply chains and prevents disruptions to broader economic activity.

4. Better Asset Recovery

• Resolution of a company as a going concern generally yields higher returns than liquidation.
• This maximises value for creditors while preserving the firm’s economic potential.

5. Reduced Burden on Tribunals

• Greater reliance on Information Utility records enables quicker verification of defaults.
• This reduces litigation, lowers caseloads before tribunals, and improves institutional efficiency.

6. Strengthening Ease of Doing Business

• An efficient insolvency framework enhances predictability and reduces business risks.
• It boosts investor confidence, improves credit availability, and supports economic growth.

Challenges Associated with CIIRP

1. Arbitrary Classification of Creditors

• Restricting initiation rights to notified institutions creates an unequal hierarchy within the class of financial creditors.
• This differential treatment lacks a strong justification despite all financial creditors having a stake in resolution outcomes.

2. Constitutional Concerns

• The classification may be challenged under Article 14 for violating the principle of equality before law.
• Excluding similarly placed creditors could fail the test of reasonable classification and intelligible differentia.

3. Exclusion of Sophisticated Investors

• Many non-notified creditors, such as investment funds and distressed asset investors, possess significant restructuring expertise.
• Their exclusion deprives the insolvency process of valuable market knowledge and competitive participation.

4. Marginalisation of Small Creditors

• Operational creditors and smaller financial lenders may have limited influence in restructuring decisions.
• This could further weaken their ability to protect their financial interests during insolvency proceedings.

5. Concentration of Bargaining Power

• The framework disproportionately strengthens the negotiating position of large notified institutions.
• Excessive concentration of power may reduce transparency and fairness in creditor negotiations.

6. Distortion of Insolvency Choices

• Excluded creditors may be compelled to initiate the more disruptive Corporate Insolvency Resolution Process (CIRP).
• This undermines the objective of providing a less intrusive and value-preserving restructuring mechanism.

7. Impact on Foreign Investment

• Differential treatment of creditors may create perceptions of regulatory bias in the insolvency framework.
• Such concerns can discourage foreign investment in distressed assets and corporate debt markets.

Global Best Practices

1. United States – Chapter 11 Bankruptcy

• Access to restructuring is determined by the financial condition of the debtor rather than the regulatory identity of creditors.
• The framework prioritises business revival and value maximisation while ensuring broad stakeholder participation.

2. United Kingdom – Part 26A Restructuring Plans

• A wide range of creditors and stakeholders can participate if they meet objective eligibility requirements.
• The mechanism provides flexibility in restructuring while balancing the interests of different creditor groups.

Way Forward

1. Universal CIIRP Framework

• All financial creditors should be allowed to initiate CIIRP, subject to appropriate safeguards and approval thresholds.
• This would create a more inclusive insolvency framework and eliminate arbitrary distinctions among creditors.

2. Default-Neutral Initiation Rule

• CIIRP initiation should be permitted when creditors representing at least 51% of total financial debt support the proposal.
• Such a threshold-based approach balances flexibility with protection against frivolous or unilateral filings.

3. Ensure Creditor Equality

• Initiation rights should be based on financial stake rather than regulatory identity.
• This would align the framework with constitutional principles of equality and fair treatment.

4. Protect Small Creditors

• Operational creditors and minority lenders should be provided meaningful participation in restructuring decisions.
• Stronger safeguards can ensure that their interests are not overshadowed by dominant creditors.

5. Strengthen Information Utilities

• Improving the accuracy, coverage, and accessibility of Information Utility records can facilitate faster insolvency proceedings.
• Reliable data would reduce disputes regarding debt and default, thereby enhancing efficiency.

6. Reduce Litigation

• Procedural provisions should be clarified to minimise interpretational ambiguities and legal challenges.
• Reduced litigation would accelerate resolutions and help preserve enterprise value during insolvency.

7. Inclusive Creditor Participation

• The insolvency framework should encourage participation from all major stakeholders involved in the restructuring process.
• Broader involvement can improve transparency, consensus-building, and legitimacy of outcomes.

8. Focus on Economic Interest

• Decision-making authority should reflect the actual financial exposure and recovery risk borne by creditors.
• Prioritising economic stake over regulatory status would promote more efficient and equitable resolutions.

9. Debtor-in-Possession Approach

• Viable businesses should be allowed to continue operations under appropriate supervision during restructuring.
• Preserving business continuity helps maximise enterprise value, protect jobs, and sustain economic activity.

Conclusion

The introduction of CIIRP marks a shift towards preserving viable businesses alongside creditor recovery. However, restricting access to notified financial institutions may undermine fairness and efficiency. A universal CIIRP based on financial stake rather than institutional identity can create a more inclusive, effective, and investor-friendly insolvency regime.