IBC Version 2.0: Course-Correction Exercise To Restore Original Intent

The introduction of the Insolvency and Bankruptcy Code (Amendment) Bill, 2025 in the Lok Sabha represents a crucial legislative intervention aimed at restoring the ‘time bound’ objective of the Insolvency and Bankruptcy Code, 2016 by addressing operational inefficiency issues and bolstering the ‘value maximisation’ objective by introducing certain novel concepts (such as group insolvency, cross border insolvency and creditor-initiated insolvency resolution process).

Amidst these proposed amendments, a major focus of the IBC Bill 2025 appears to be on correcting the course of certain issues which had arisen on account of interpretive ambiguities emanating from judicial pronouncements and misuse of certain provisions. While the IBC has largely achieved its intended objectives, however, these unfitting interpretations of its provisions and the misuse has undermined its original intent and caused some setback to its effectiveness.

In this blog, the authors have discussed a few key amendments proposed in the IBC Bill 2025 which seek to address some of these interpretive ambiguities and curtail the misuse of certain provisions.

Judicial precedents have played an instrumental role in shaping the jurisprudence of the IBC and protecting its intent and objective. However, in an attempt to address the legislative gaps, certain judicial rulings have resulted in deviation from the original intent/objectives of the Code, thereby giving rise to inconsistencies and unwarranted outcomes. Some of the key areas impacted by such rulings are as follows:

Admission of an insolvency application filed by a financial creditor was always envisaged to be contingent on the existence of one fact, i.e., payment default (such intent being made amply clear through committee reports. However, the Supreme Court in the Vidarbha Industries judgment surprisingly interpreted usage of the word ‘may’ in Section 7(5) to give discretionary powers to the adjudicating authority to admit or reject such an application and further held that such discretion can extend to an examination of all the relevant facts and circumstance surrounding the case.

This judgement became a subject of considerable discussions amongst the stakeholders, as the discretionary power made available to the adjudicating authority opened doors to divergent rulings and made the admission of insolvency applications contingent on its subjective wisdom. Consequently, this contributed to delays at the admission stage (and even rejection of insolvency applications in several cases on the basis of the extraneous factors ignoring the factum of an existing payment default), thereby undermining the true essence of IBC and affecting the time-bound objective.

In order to finally settle the issue caused by the misinterpretation, the IBC Bill 2025 proposes to replace the usage of ‘may’ in Section 7 with the word ‘shall’ to avoid the ambiguity of discretion and has further stated that if existence of debt and default are established, no other factors are to be considered for admission of the application.

One of the highly debated judgments of the SC that directly affected the interests of the secured financial creditors was the Rainbow Papers judgement wherein it was ruled that such governmental/statutory authority whose governing statute provides for a first charge over the assets of the corporate debtor against its outstanding dues towards such authority and if such statute has overriding effect over IBC, then such authority will fall under the definition of ‘secured creditors’ for the purposes of IBC and will rank pari passu with other secured creditors of the corporate debtor in terms of distribution of resolution or liquidation proceeds. This was despite the fact that (i) the Preamble to the IBC categorically states that this law is for altering the priority of payment of Government dues, similar to other jurisdictions and (ii) Section 53 of the IBC clearly putting Government dues lower in the distribution hierarchy (even below unsecured creditor dues). This impacted the payouts to secured financial creditors.

The IBC Bill 2025 proposes to deal with this issue by adding an explanation to the definition of the term ‘security interest’ to specifically exclude any security interest created by operation of law.

The clean slate principle was always embedded in the IBC as one of its cornerstones[ – and the same was confirmed by the Supreme Court in the Ghanshyam Mishra judgment as well as the Essar Steel-II judgment wherein it was held that once a resolution plan is approved by the adjudicating authority, it becomes binding on all the stakeholders, extinguishing all the liabilities and claims that are not included in the approved resolution plan, so that the successful resolution applicant is not burdened with any past liabilities.

Despite these rulings, there have been several cases of creditors (especially tax authorities) having raised demands on the corporate debtor or the successful resolution applicant post plan approval for past dues/liabilities on the ground inter alia that tax dues (being sovereign dues) cannot be extinguished by placing them on the same pedestal as other liabilities. In the case of acquisition of Bhushan Steel Ltd by Tata Steel Ltd, the state tax authorities raised several demands on BSL for assessment period falling prior to its acquisition by TSL, which demand claims were eventually struck down by the Allahabad High Court. In M/s Empee Distilleries Ltd. v. TANGEDCO[13], the Madurai Bench of the Madras High Court has apparently deviated from this well settled clean slate principle by holding that non-disclosure of known debts disentitles the resolution applicant from the ‘clean slate’ protection.

The proposed amendments in Section 31 as mentioned in the IBC Bill 2025 would likely settle this issue once and for all as the language of the said amendment categorically provides inter alia that upon approval of the plan by the adjudicating authority, all claims prior to the date of plan approval shall stand extinguished and no proceedings can be initiated on the basis of such claims (including for their assessment).

While IBC is supposed to be a creditor driven regime and a collective scheme framework, there have been certain legislative loopholes which were being misused by certain unscrupulous debtors (and in some cases, by creditors as well) to prevent the company from an insolvency process and to stall other creditor actions. Some of these loopholes and avenues for misuse include the following:  

Even prior to introduction of Section 12A in the IBC, withdrawal of insolvency applications on the basis of the settlements arrived at between the applicant creditor and the promoters was being allowed by the Supreme Court using its plenary powers under Article 142 of the Constitution of India[15]. Such withdrawals were formalised vide introduction of S. 12A[16] with requirement of 90% CoC approval (followed by NCLT’s approval) on the settlement proposals. Further, as per Regulation 30A of the CIRP Regulations, an application for withdrawal can be filed any time prior to constitution of CoC or post that, including post issuance of invitation for expression of interest. The idea was to ensure business continuity by encouraging resolutions outside a formal insolvency framework.

However, this route was being misused as there was no outer timeline stipulated for submission of such settlement proposals and there being lack of transparency in the approval of such proposals raising concerns of fairness and accountability. This resulted in situations where such proposals (i) were being submitted/considered not only after invitation of EoIs[17] but also after receipt of resolution plans[18] and, in some cases, post passing of the liquidation order[19], thereby causing unwarranted delays and impacting investors’ interest; and (ii) were being approved in a manner (in some cases) detrimental to other stakeholders especially operational creditors[20]. The judiciary, in several cases, cautioned against such misuse to prevent any unfair practices in the garb of contractual freedom and commercial wisdom[21]. The SC, in the Glas Trust case[22], while setting aside a withdrawal allowed by the NCLAT/NCLT, held that once the application is admitted, the proceedings are in rem and would concern all the stakeholders including the other creditors (and not only the applicant creditor) and therefore, the inherent powers of the NCLT under Rule 11 of the NCLT Rules cannot be exercised for allowing withdrawals by sidelining the structured process set out under IBC and against the collective interests of all creditors.

The IBC Bill 2025 now aims to address this issue (though partially) by including a non-obstante provision stating that an insolvency application cannot be withdrawn before the constitution of the CoC and after the RP has issued the first invitation for submission of resolution plans. However, the issue regarding settlement proposals affecting interests of the operational creditors still remains open.

The concept of interim moratorium in personal insolvency inter alia prevents creditors from initiation or continuation of any legal proceedings in respect of the debt owed by the borrower/personal guarantor, upon mere filing of the insolvency application. The purpose of the interim moratorium, as clarified by the Supreme Court, is to mainly provide an interim relief to the borrower from any creditor action to ensure an opportunity to reorganise her/his financial affairs to aid the repayment or resolution of the debt. However, some unscrupulous borrowers started misusing this provision by filing (and also refiling upon rejection) voluntary insolvency applications under Section 95 to avail the benefit of the interim moratorium and also the delays at the NCLT helped their agenda.

From holding that interim moratorium would commence only after the application has been scrutinised and numbered by the Registry (and not merely on filing)[25] to taking cognizance of the rampant abuse of the process and issuing directions to the NCLT to follow strict procedural timelines for ensuring timely numbering of the application for listing[26], the higher courts have attempted to curtail the misuse in several cases.

Now, the IBC Bill 2025 proposes to do away with the interim moratorium concept. This will bring a major relief to the creditors.

These amendments being proposed in the IBC Bill 2025 have come at the right time when the stakeholders’ confidence in the IBC was getting impacted on account of severe delays in commencement and conclusion of a CIRP process, in addition to the specific issues that were being faced on account of interpretational ambiguities and legislative loopholes. Once introduced, these would go a long way in improving the efficacy and effectiveness of the operation of IBC thereby ensuring that it continues to remain a creditor-controlled and time-bound resolution framework, without being weighed down by long-drawn litigations, misuse by debtors or unwarranted interpretations.