•Abstract
The Insolvency and Bankruptcy Code (IBC), 2016, was a paradigm shift in the Indian insolvency regime as it was designed to be based on a creditor-in-control model, rather than the debtor-in-control one, with a view to promoting efficiency, transparency, and expediency in recovery. This paper will focus on the historical development, the major structural developments, and the influence of the IBC, specifically, the creditor hierarchy provided by section 53, and the critical role of the Committee of Creditors (CoC). It examines the role of judicial interpretations in cases like Essar Steel, Rainbow Papers, and Amit Metalik cases that have changed the boundaries of the creditor rights and priorities and occasionally caused uncertainty in the treatment of the secured creditors and the statutory creditors. Also examined is the IBC (Amendment) Bill, 2025, which is an attempt at simplifying the admission processes, limiting frivolous lawsuits, and bringing back sanity to the priority waterfall process. Lastly, it provides suggestions on how a more balanced, predictable, and globally harmonized insolvency framework that ensures fairness to all classes of creditors can be achieved, as well as maintains investor confidence and economic stability.
Keywords
Insolvency and Bankruptcy Code, 2016, creditor-in-control, Committee of Creditors, Section 53, secured creditors, liquidation waterfall, judicial interpretation, IBC Amendment Bill, 2025, insolvency resolution, financial creditors, operational creditors, India.
Introduction
The Insolvency and Bankruptcy Code (IBC) of 2016 was a significant departure from the before the old insolvency resolution process in India to the creditor-in-control model, which moved away from the previous regime where the debtor manager continued to control the management of the firm until the conclusion of the insolvency process. The belief with this reform was that it would yield efficiency, encourage entrepreneurship, and align India's insolvency system with international best practice. The new code states by providing that where the management of a corporate debtor is deprived of control at the expense of its management in an event of default by the debtor, a resolution professional nominated by an adjudicating authority and Committee of Creditors (CoC) whose members are predominantly financial creditors, participate in the process. The aim of this transfer of power is to promote good business behavior, reduce the average resolution period of four or five years to less than one year and eliminate value destruction that may be a hallmark of late insolvency. Section 53 of the IBC enshrines a definitive and specific waterfall mechanism for the distribution of liquidation proceeds, providing a hierarchy between various classes of creditors, seeking fair treatment but creating fresh conflicts over the practical implementation of such priority rules. The evolution to the creditor-in-control model is viewed as a key force in bringing about systemic change, one that has been able to achieve equilibrium on the leverage between corporate debtors and creditors but that also raises new issues of granularity and equity in the prioritization, particularly as newer judicial precedents continue to evolve in the field.
History
Prior to the IBC, Indian insolvency regulations were piecemeal in multiple legislations, and none of them had a well-rounded or efficient mechanism for handling corporate distress within a reasonable time. Provincial Insolvency Act (1920) and Presidency Town Insolvency Act (1909) mostly addressed personal insolvency, with no definite mechanisms to handle intricate corporate failures. The Companies Act of 1956, subsequently amended in 2013, touched upon the issue of winding up of companies but did not bring about expeditious and consistent procedures for the rehabilitation or wind-up of troubled corporate groups. The Sick Industrial Companies Act of 1985 provided for voluntary restructuring of "sick" industrial companies, but problems of implementation and absence of time-bound closures led to wide-ranging delays and erosion of value. Despite the following reforms under the Companies Act, 2013, and amendments to enable greater voluntary arrangements and compromise schemes, these legislative changes fell short of improving creditor recovery to the fullest extent or enhancing market confidence. The inefficacy and non-integration in this antiquated regime resulted in extended insolvency proceedings, redundant overlapping legal recourses, and little realization of assets for stakeholders, thereby setting the stage for the thorough and integrated IBC now applicable to all types of corporate insolvency in India.
Impact on Secured Creditors
Section 53 of the IBC defines a formal framework for deciding how the property of a corporate debtor is to be distributed upon liquidation, specifically mandating certain classes of creditors to be given priority while enacting the "waterfall" mechanism that has been at the heart of the new insolvency process. Under the IBC, the interests of secured creditors rest upon a narrowly defined priority ladder: they are given prominence of position in the order following payment of insolvency and liquidation process fees and along with some employee dues. Under the new regulation protection, it is worth noting that in the event of liquidation, secured creditors, by virtue of Sections 52 and 53, may decide to abandon their security interests in the liquidated estate and receive their proceeds in due course; or, proceed to realize their secured assets on their own terms, which will have to be in accordance with the new regulation protection IBC. An application of these provisions has brought about a lot of judicial controversy. As its example, the seminal cases like Essar Steel India Limited v Satish Kumar Gupta uphold the high ranking of the financial creditors and appeal to the purpose of the code in distinctions between financial and operational creditors. Certain recent Supreme Court cases in State Tax Officer v Rainbow Papers Ltd and Paschimanchal Vidyut Vitran Nigam Ltd. v Raman Ispat re-conceived the regard of government dues in some cases as secured claims, making creditor peckings more complex and politicized. Subsequent tribunals and courts have struggled with the implications, with rulings that concentrate on equality between security creditors who give-up security interests and controversial earnestness as to treatment and priority of statutory as compared to consensual security interests. The controversy evidences unresolved conflicts between the legislative policy behind creditor preference and practical exigencies of creditor recoveries, fairness, and predictability in insolvency administrations.
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