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Insolvency and Bankruptcy Code: What's all the noise about?

Updated: Jan 28, 2019

There have been major debates, whether the implementation of IBC is a boon or a bane

The Government of India implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA)— a problem that has been pulling the Indian economy down for years.

About one year ago, India’s NPA ratio was higher than any other major emerging market (with the exception of Russia), higher even than the peak levels seen in Korea during the East Asian crisis. Sectors such as energy and infrastructure, metals and mining, procurement, construction, and so on, in particular, had taken hits and showed signs of weakness. Making things worse, India’s crème-de-la-crème thought they could walk away from their debts without facing any consequences.

The Code provides an order of priority to distribute assets during liquidation. 

It is unclear why: (i) secured creditors will receive their entire outstanding amount, rather than up to their collateral value, (ii) unsecured creditors have priority over trade creditors, and (iii) government dues will be repaid after unsecured creditors.

Supreme Court upholds Bankruptcy Code, rejects promoters' challenges 

The Supreme Court on Friday upheld the constitutional validity of the Insolvency and Bankruptcy Code (IBC) in its entirety. The IBC law was passed in 2016 to prevent defaulting promoters from regaining control of their companies.

While upholding the law, a bench led by Justice RF Nariman rejected the plea to give operational creditors parity with financial creditors. On related parties, the apex court said that it should mean a person connected with the business.

The order also upheld the Section 29A of the IBC which bars promoters of a company facing insolvency proceedings from bidding for it to regain control.

Success Of IBC, 2016.

the total flow of resources to the commercial sector in India, both bank and non-bank, and domestic and foreign (relatable to the non-food sector), has gone up from a total of Rs 14,530.47 crore in FY17 to Rs 18,469.25 crore in FY18 and to Rs 18,798.20 crore in the first six months of FY19. These figures show that the IBC is largely successful.

According to legal observers, the SC order is a setback for the Essar Group promoters, Ruias, who have offered to clear all dues to regain control of Essar Steel. Otherwise, ArcelorMittal’s bid of `42,000 crore has been approved by the committee of creditors. A final ruling on this matter is pending before the Ahmedabad bench of the National Company Law Tribunal, which is expected to give its order on January 31.

According to statistics, India is ranked 103 in the World Bank’s rankings of how nations handle insolvencies. Before the introduction of IBC, it took companies about four to five years to dissolve its operations; the number has dropped drastically to a year. This has not only increased the ease of doing business but also imbibed a stronger sense of trust in lenders and investors.

India’s Economy is on the higher side compared to China. As per IMF Estimates, India Growth Rate Would be 7.5 & 7.7 for 2019 and 2020 respectively.

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There have been major debates, whether the implementation of IBC is a boon or a bane. Or is it just a great move with teething problems. Historically, the entire process of insolvency and liquidation has always been in the hands of the shareholders and debt holders. Generally, by the time the entire process was over, the assets were eroded with very little left for distribution.

All in all, the IBC seems to be in its elementary stage, backed by a strong structure and framework. The government is continuously evolving and bettering the provisions of the code; furthermore, the Supreme Court (SC) has also amended it multiple times already.

The general belief is that it will certainly enable banks to take early legal steps. The aim of the IBC is to develop a proper insolvency resolution process, which focuses on resolution and not become a recovery mechanism. Now, it seems to be a work in progress, with better future prospects if it overcomes its present obstacles, plugs gaps and tackles important issues.

The Insolvency and Bankruptcy Code is

a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market. It would take India from among relatively weak insolvency regimes to becoming one of the world’s best insolvency regimes. It lays the foundations for the development of the corporate bond market, which would finance the infrastructure projects of the future. The passing of this Code and implementation of the same will give a big boost to ease of doing business in India.

Reference: Forbes India, Finance Express, ET.

#Finance #Economy #Yojana #2019 #prelims #upsc #tnpsc #Group1 #Group2Mains

#Budget #IBC #SupremeCourt #Essar

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