The Insolvency And Bankruptcy Code (Amendment) Bill, 2025: A Timely Overhaul

The Insolvency and Bankruptcy Code (Amendment) Bill, 2025: A Timely Overhaul

Introduction

On August 13, 2025, the Government of India introduced the Insolvency and Bankruptcy Code (Amendment) Bill, 2025 ("Bill") in the Lok Sabha. The Bill proposes significant reforms to the Insolvency and Bankruptcy Code, 2016 ("IBC"), India's principal law for resolving financial distress in a time-bound manner.

The IBC was enacted to provide a unified legal framework for addressing corporate and individual insolvency, with a focus on maximising asset value, improving credit discipline, promoting entrepreneurship and enabling smoother exits for failing businesses. It not only replaced a fragmented legal framework but also introduced a market-driven, creditor-controlled process, empowering stakeholders to resolve financial distress in a time-bound and effective manner.

However, as cases grew in scale and complexity over a decade since the IBC's introduction, several interpretational and procedural gaps became apparent. Accordingly, the Bill aims to address, inter alia, these gaps and reinforce the core purpose, i.e., timely and effective resolution of financial distress while ensuring maximisation of assets.

This article breaks down the key proposals in the Bill and analyses how they aim to make insolvency resolution more effective, inclusive, and aligned with global best practices.

Key Proposals

1. Creditor-Initiated Insolvency Resolution Process (CIIRP)

The Bill introduces Creditor-Initiated Insolvency Resolution Process ("CIIRP"), a formalized out-of-court insolvency resolution mechanism allowing notified classes of financial creditors (following the approval of at least 51% of creditors by value) to initiate resolution proceedings by directly appointing a Resolution Professional ("RP"), effectively bypassing the Adjudicating Authority's ("AA") initial involvement. Under CIIRP, the corporate debtor's ("CD's") management retains control subject to creditor oversight, while an RP ensures compliance and attends board meetings, with limited veto power. The process must conclude within 150 days (extendable by 45 days), failing which it converts automatically to the traditional Corporate Insolvency Resolution Process ("CIRP").

Emphasizing early intervention and cooperative restructuring, CIIRP aims to expedite resolutions and reduce court burdens. It empowers creditors to initiate proceedings and preserves enterprise value by allowing the CD's management to continue operations subject to oversight. Notably, unlike CIRP, CIIRP limits the RP's role by not granting management control. Measures to ensure oversight and information symmetry are expected to be prescribed by the Central Government.

It remains to be seen as to what outstanding debt thresholds are prescribed by the Central Government as eligibility conditions for initiators of CIIRP. In addition to the grounds that lead to automatic conversions of the CIIRP into CIRP, being non-receipt of resolution plan by the AA in the above mentioned timeline, or the resolution plan being rejected by the AA, or due to the CD's non-cooperation, a CIIRP can also be converted voluntarily into a CIRP by way of a resolution supported by at least 66% of the eligible creditors by value. The option to convert CIIRP to CIRP mid-process may lead to repeated proceedings, prolonged timelines, and increased litigation, unless adequate procedural safeguards are prescribed by notifying relevant rules.

2. Group Insolvency

The Bill introduces Section 59A, enabling the Central Government to frame rules for conducting group insolvency proceedings involving two or more related CDs connected by control or significant ownership. This marks a shift from the IBC's traditional entity-specific approach to a more coordinated framework. The reform essentially aims to address complex financial and operational linkages within corporate groups, and seeks to avoid value erosion from fragmented proceedings. While it is currently an enabling provision, its effectiveness will depend on the clarity and practicality of the rules that will eventually be notified. Nonetheless, judicial developments such as in State Bank of India v. Videocon Industries Ltd.¹ and Edelweiss Asset Reconstruction Co. v. Sachet Infrastructure Pvt. Ltd.², where insolvency proceedings were substantively consolidated or conducted simultaneously for group entities, have laid the groundwork for such a regime.

3. Cross-border Insolvency

The Bill introduces Section 59C to the IBC, empowering the Central Government to frame rules for conducting cross-border insolvency proceedings for specified classes of debtors. This enabling provision seeks to address the growing need for a structured mechanism to deal with CDs having assets or stakeholders across jurisdictions, as highlighted by proceedings such as those in Jet Airways (India) Ltd. (Offshore Regional Hub/Offices) v. State Bank of India³ and State Bank of India v. Videocon Industries Ltd. (supra).

In the absence of a formal framework, Indian insolvency proceedings have faced recognition challenges abroad, despite occasional cooperation from foreign courts. The proposed framework is expected to align with international best practices, including the UNCITRAL Model Law on Cross-Border Insolvency, 1997, and aims to reduce delays, enhance legal certainty, and facilitate effective coordination with foreign jurisdictions.

4. Resolving the conundrum of judicial precedents

The Bill addresses key judicial ambiguities that conflicted with the creditor-driven framework of the IBC.

• Notably, it overrides the Supreme Court's ruling in Vidarbha Industries Power Limited v. Axis Bank Limited(2022)⁴, by mandating that once the AA confirms the existence of financial debt and default, it must admit the Section 7 application without considering factors like the debtor's financial health. This reinforces the summary admission process and ensures timely insolvency commencement.
• The Bill also nullifies the State Tax Officer v. Rainbow Papers Limited(2022)⁵ ruling, by clarifying that "security interest" under Section 3(31) includes only contractual rights, excluding statutory charges created by law, thereby restoring secured creditors' priority over statutory dues in the repayment hierarchy.
• Additionally, the Bill seeks to revise the timeline for obtaining the Competition Commission of India's approval, allowing it to be obtained any time after the CoC has approved the resolution plan but before it is submitted to the AA, overriding Independent Sugar Corporation Limited v. Girish Sriram Juneja (2025)⁶. This change brings statutory requirements in line with practical considerations and helps avoid non-admission of resolution plans on procedural technicalities.

These amendments collectively serve to restore certainty, reinforce creditor rights, and realign the IBC's implementation with its original legislative intent, importantly that of time-bound resolution of financial distress.

5. Strengthening CIRP – Key Procedural Reforms

I) Application of Moratorium on actions by guarantors against CD: A significant amendment to Section 14 clarifies the scope of the moratorium concerning sureties and guarantors. While the moratorium will no longer apply to guarantors of the CD—meaning creditors can enforce guarantees against them during the CIRP—the moratorium will continue to restrict any action that these guarantors may initiate against the CD itself. In other words, guarantors remain personally liable and are not shielded by the moratorium, but they cannot use the moratorium to pursue recovery or enforcement against the CD during the operation of the moratorium.

II) Second Chance Insolvency Proceedings: The Bill provides that the AA, before passing an order for liquidation, can consider an application by the CoC if the CoC decided to restore or reinstate the CIRP by way of a 66% approval.

• In case a liquidation order was passed due to no resolution plan being submitted, the AA may restore the CIRP to be completed within a period not exceeding 120 days.
• Similarly, in case a liquidation order was passed pursuant to a resolution plan having been rejected for non-compliance, the AA can restore the CIRP to the stage of request for resolution plan, and for such process to be completed within a period not exceeding 120 days. Further, such restoration would apply to all such CIRP proceedings where liquidation orders have not been passed.

The Bill clarifies that such CIRP restoration can only happen once. Thus, in case the CoC displays willingness to undergo insolvency proceedings again and prevent liquidation, a formal mechanism for the same has been introduced.

III) Revocation of CD's Right to Nominate RP: The Bill removes the CD's right to propose an interim RP when filing an application under Section 10. Instead, the AA will appoint the interim RP based on recommendations from the Insolvency and Bankruptcy Board of India, enhancing transparency, corporate governance, and reducing promoter influence during the crucial initial stages of CIRP.

IV) Increase in Minimum Amount Payable to Dissenting Financial Creditors:
The Bill amends the minimum amount payable to dissenting financial creditors by requiring that they be paid the lesser of the liquidation value or the amount distributable under the resolution plan according to the priority order in Section 53(1). Previously, dissenting creditors were entitled to receive at least the liquidation value, which often incentivized secured creditors to prefer liquidation over resolution if the resolution plan offered a lower payout. This amendment removes that incentive by aligning the minimum payout with the actual distribution under the resolution plan, thereby encouraging creditors to support the resolution of the CD.

V) Continuation of CoC in Liquidation Process: The Bill allows the CoC formed during CIRP to continue supervising the liquidation process, instead of being replaced by the Stakeholders Consultation Committee. This would essentially ensure continuity and avoid delays in liquidation oversight.

VI) Opportunity for CoC to Rectify Defects in Resolution Plan: Before rejecting a resolution plan for non-compliance, the AA may now give the CoC a chance to fix defects. This would help prevent avoidable liquidations and supports the resolution of the CD as a going concern.

VII)Separate Approval Orders for Resolution Plan and Distribution Framework
The Bill permits staggered approval where the resolution plan can be approved first, and the distribution of proceeds approved within 30 days thereafter. This prevents delays caused by disputes over claim treatment from holding up the overall approval of the plan.

The above changes are expected to improve fairness, transparency, and efficiency in the insolvency process. By clarifying the role of guarantors, reducing promoter influence, empowering RPs, and encouraging creditor support for resolution plans, it strengthens the chances of successful restructuring while ensuring smoother liquidation oversight and faster approvals.

6. Strengthening Liquidation – Procedural Reforms

I) Moratorium applies during liquidation process
The Bill extends a moratorium similar to that under Section 14 to the liquidation stage, prohibiting new or ongoing legal actions against the CD and restricting enforcement of security interests, except for limited exceptions to be notified by the government. Secured creditors must enforce their security within 14 days of liquidation commencement, after which only the liquidator can sell the assets. This aligns liquidation proceedings with CIRP protections, aiming to preserve value during liquidation.

II) Direct dissolution of CD without liquidation
The Bill empowers the CoC to directly resolve to dissolve a CD and decide on asset disposal and distribution, subject to conditions to be prescribed. The AA, upon receiving such decision of the CoC, may pass an order for dissolution of the CD without undergoing the liquidation process This provision can enable faster closure for companies where liquidation may not be necessary in the view of the CoC.

III) Right to file applications for avoidance transactions
The Bill expands the right to file applications for reversal of avoidance transactions beyond the RP or liquidator to include creditors (individually or jointly), members, or partners of the CD. It also empowers the AA to initiate disciplinary proceedings against professionals who fail to report such transactions, ensuring greater accountability and timely detection of fraudulent or undervalued transactions.

IV) Timeline for secured creditors to realize security interest in liquidation
The Bill mandates secured creditors to notify the liquidator of their decision to enforce security interests within 14 days from the commencement of liquidation, shortening the earlier 30-day timeline. Failure to do so will result in the security interest being deemed relinquished to the liquidation estate, thereby streamlining asset realization and avoiding delays.

V) Inter-se priorities among creditors during liquidation
The Bill clarifies that, while contractual arrangements disrupting priority under Section 53(1) are disregarded, valid inter-creditor or subordination agreements among creditors of the same class are recognized. This resolves market uncertainty following conflicting judicial rulings, such as Technology Development Board v. Mr. Anil Goel, Liquidator of Gujarat Oleo Chem Ltd. & Ors.⁷, and ensures that creditor relationships and priorities agreed outside insolvency continue to apply within liquidation.

While finer details vide relevant rules in relation to above proposals are awaited, the Bill evidently aims at overhauling the liquidation process by adding protections similar to those at the resolution stage, helping protect the CD's value and making the process faster and clearer. It gives creditors and committees more control to resolve cases quickly while preventing misuse of assets, creating a fairer and more efficient system for everyone involved.

Conclusion

Evidently, the Bill is an encouraging step in the right direction and addresses multiple concerns that have been voiced by industry over time. The amendments contemplated in the Bill can vastly improve the efficiency as well as effectiveness of the IBC, leading to, inter alia, a significantly positive economic impact. While how the Bill will be operationalised can be more fully appreciated once the corresponding rules are notified, nevertheless, the wide ambit of the Bill's proposals indicate that the IBC will continue to evolve based on changing industry needs, with an emphasis on developing procedures that can facilitate suitable outcomes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.