The Insolvency and Bankruptcy Code: CIRP, pre-packs and haircuts

Detail

1. Basic terms

• Insolvency is a financial condition. It means a person or firm cannot pay its debts when they fall due.
• Bankruptcy is a legal status. The adjudicating authority (the tribunal that decides these cases) declares a person or firm bankrupt.

• Insolvency is the money problem. Bankruptcy is the legal label that follows.

• NPA link: when a borrower stops paying, the bank's loan becomes a non-performing asset (NPA, a loan whose interest or principal is unpaid for 90 days). The IBC is one of the main tools banks use to recover NPAs.

2. Why the IBC came: the pre-2016 mess

• IBC 2016 replaced SICA/BIFR (1985). SICA was the Sick Industrial Companies Act, and BIFR was the Board for Industrial and Financial Reconstruction.
• Before 2016, stressed companies were handled under several overlapping laws:
• the Companies Act
• SICA
• debt recovery laws

• SARFAESI (the law that lets secured lenders seize and sell collateral without going to court) [4]

• What went wrong:

• Each law had its own forum, so proceedings were split up and forums overlapped [4].
• Cases stayed pending for years, and the value of the assets kept falling [4].

• Creditors recovered little, and credit discipline became weak [4].

• The IBC's big shift: from "debtor in possession" (the promoter keeps running the company while it is in default) to "creditor in control" (the lenders decide the company's future).

• The IBC is one unified law for companies, partnership firms and individuals [4].
• The Supreme Court upheld its validity in Swiss Ribbons v. Union of India (2019).

3. Four pillars of the IBC

Pillar	Role
IBBI (Insolvency and Bankruptcy Board of India)	Regulator. It oversees insolvency processes, insolvency professionals and related bodies, and frames regulations [4]
Adjudicating authorities	NCLT (National Company Law Tribunal) for companies. Appeals go to NCLAT (the Appellate Tribunal) [4]. DRT (Debt Recovery Tribunal) handles individuals
Insolvency professionals (IPs)	Licensed professionals. They run the distressed firm, protect its assets and hold creditors' meetings [4]
Information utilities (IUs)	Electronic stores of records of debts and defaults. Under the 2026 Act, an IU record is enough proof of default [3]

4. Who can trigger the process

• Threshold: a default of Rs 1 crore or more. It was raised from Rs 1 lakh in March 2020 to keep small (mostly COVID-era) cases out of the tribunals.
• Financial creditors lent money, such as banks and bondholders. Only they sit on the Committee of Creditors.
• Operational creditors are owed for goods, services, wages or government dues. They can file a case but do not vote in the CoC.
• Admission timeline: the NCLT must decide an application within 14 days. If it does not, it must record its reasons in writing (IBC Amendment Act 2026) [3][4]. Admission becomes mandatory once the legal conditions are met [3].

5. Corporate Insolvency Resolution Process (CIRP): step by step

1. The NCLT admits the application.

2. Moratorium under s.14 (a legal "freeze"). No suits, recovery or asset sales can be started against the company. This gives it breathing space. - Under the 2026 Act, the moratorium also covers cases involving guarantees. Creditors can no longer use a guarantee to get around the process [4].

3. The Interim Resolution Professional (IRP), later the Resolution Professional (RP), takes over the company's management from the board. - The 2026 Act makes it simpler to appoint the RP [4]. - Employees and promoters now have a wider duty to cooperate with the RP [4].

4. The Committee of Creditors (CoC), made up of financial creditors, invites and votes on resolution plans (bids to revive the company). A plan needs 66% of the vote by value to pass.

5. Deadline: 180 days + 90-day extension, with an outer limit of 330 days including litigation (2019 amendment) [4].
6. No plan is approved, so the company goes into liquidation (it is shut down and its assets are sold).

Worked example: voting by value

• The CoC holds Rs 1,000 crore of claims. Bank A has Rs 500 crore, Bank B Rs 200 crore and Bondholder C Rs 300 crore.
• A (50%) and B (20%) vote yes, so 70% ≥ 66% and the plan is approved.
• A and C vote yes, so 80% and the plan is approved.
• B and C vote yes, so 50% < 66% and the plan is rejected, even though two of the three creditors agreed.

Guard rails

• s.29A bars defaulting (wilful or NPA-holding) promoters and connected persons from bidding. This stops a promoter from buying back their own company cheaply. Its eligibility rules were changed in 2018 [4].
• Essar Steel (SC, 2019): the CoC's "commercial wisdom" is supreme. Courts cannot rewrite the business terms of an approved plan.
• Dissenting creditors (2026 Act): a creditor who votes against a plan must get at least the lower of (a) its liquidation value or (b) what it would get if the plan's money were shared under the s.53 waterfall [4].
• Withdrawal (2026 Act): a case can now be withdrawn only after the CoC is formed and before resolution plans are invited, with 90% CoC approval [3][4].
• Other 2026 changes:
• Plans can be approved in phases [4].
• Licences and permits of the company are protected after the plan is approved [4].
• Guarantors' assets can be brought into the process if creditors approve [4].
• Cases about avoidance transactions (unfair preference, transfers below value, fraud) and fraudulent or wrongful trading (s.66) can continue after the CIRP ends [4].

6. Liquidation and the s.53 waterfall

• The liquidation waterfall (s.53) is the order in which money from selling the assets is paid out. Each rank is paid in full before the next rank gets anything: 1. Costs of the insolvency process and liquidation 2. Secured creditors and workmen's dues for 24 months (ranked equally) 3. Other employees' dues for 12 months 4. Unsecured financial creditors 5. Government dues and the secured creditors' shortfall 6. Other debts 7. Preference shareholders 8. Equity shareholders

• Government dues are not "secured" (2026 Act):

• A security interest now exists only when it is created by agreement between the parties. A charge created just by operation of law does not count [4].
• So statutory (tax) dues are excluded from "secured creditor" status [3].

• They stay at rank 5.

• Liquidation reforms (2026 Act):

• Liquidation must finish in 180 days, extendable by 90 days [3].
• Voluntary liquidation must finish within 1 year [3].
• The CoC now supervises liquidation and can appoint or replace the liquidator [3][4].
• The liquidator's quasi-judicial power to decide claims is removed [3].
• A one-time restoration of the CIRP is allowed before liquidation is final [4].

7. Outcomes: haircuts and realisation

• Haircut: the loss creditors accept when they recover less than they are owed. (The word also means the discount applied to the value of collateral.)
• Formula: Haircut (%) = (Admitted claim − Amount realised) ÷ Admitted claim × 100

• Realisation (%) = 100 − Haircut (%)

• Worked example:

• Admitted claims = Rs 1,000 crore. The plan pays Rs 330 crore.
• Haircut = (1,000 − 330) ÷ 1,000 × 100 = 67%, so realisation = 33%.
• If liquidation value is Rs 200 crore, the plan gives 330 ÷ 200 = 165% of liquidation value.

• So the haircut is high, but creditors still get far more than they would by shutting the firm down.

• Official data:

• 8,987 CIRPs admitted and 1,419 companies resolved through approved plans (till March 2026) [4].
• Creditors realised about Rs 4.32 lakh crore, which is over 94.56% of fair value (March 2026) [4].
• 1,194 companies resolved, with Rs 3.89 lakh crore realised. That is over 170% of liquidation value and over 93% of fair value (August 2025) [2].
• Average recovery was 33% of admitted claims (as of 30 June 2025) [3] (NCERT: "about one-third"). An IIM Ahmedabad study found 32% of admitted claims and 168% of liquidation value [4].
• Average resolution time: 602 days, against the 330-day legal limit (as of 30 June 2025) [3] (NCERT: "far beyond 330 days").

• 43% of closed cases ended in liquidation, which is 2,824 of 6,587 (as of 30 June 2025) [3].

• IBC's share in bank recoveries:

• Scheduled commercial banks recovered Rs 1,04,099 crore in 2024-25.

• The IBC brought in Rs 54,528 crore (52.4%), more than SARFAESI, DRTs or Lok Adalats [4] (RBI Report on Trend and Progress of Banking in India 2024-25).

• Effect on firms and borrowers:

• Resolved firms saw sales grow by 76%, capital expenditure rise by 130%, and the market value of listed firms rise from Rs 2 lakh crore to Rs 6 lakh crore (IIM-A study) [4].
• Credit culture (IIM Bangalore study): loans now stay "overdue" for a shorter time before becoming "normal". The time fell from 248–344 days to 30–87 days [4].
• The threat of losing the company makes promoters pay on time.

8. Pre-packaged insolvency (PPIRP, 2021)

• Pre-pack: the debtor and its creditors agree on a plan before formal proceedings start. The NCLT then mostly approves it.
• The pre-pack was brought in by the 2021 amendment, first by ordinance [4]. IBBI notified the PPIRP Regulations, 2021 [6].
• Main features:
• For MSMEs only (micro, small and medium enterprises), with a default of Rs 10 lakh or more.
• The debtor keeps control, with creditors supervising (a "debtor-in-possession" model) [4].
• Must finish in 120 days.

• It starts only if 66% of unrelated financial creditors (lenders not connected to the promoter) approve.

  • The Select Committee (December 2025) recommended cutting this to 51% [5].
  • Verify whether the final 2026 Act adopted 51%.

• Why use it: it is cheaper and faster. The business keeps running, so its value does not fall.

• Weakness: uptake has been low. MSME promoters rarely start the process early, and creditors often prefer the full CIRP.

9. Creditor-Initiated Insolvency Resolution Process (CIIRP): now law

• IBC (Amendment) Bill 2025:
• Introduced in the Lok Sabha on 12 August 2025 and sent to a Select Committee (Chair: Baijayant Panda) the same day [3].
• The Select Committee reported on 17 December 2025 [3].
• Passed by the Lok Sabha on 30 March 2026 and the Rajya Sabha on 1 April 2026 [3].

• It is now the IBC (Amendment) Act, 2026 [4]. (NCERT: "went to Select Committee".)

• How CIIRP works:

• Who starts it: only financial institutions notified by the Centre, after a default on their debt [3].
• Threshold: 51% by debt value of notified financial creditors must agree [3].
• It starts out of court, with no NCLT admission stage [3][4].
• The debtor stays in possession, overseen by an RP [3].
• Deadline: 150 days + 45 days [3].
• The CoC can convert it into a regular CIRP at any time [3].

10. Cross-border and group insolvency

• Cross-border insolvency: the debtor has assets or creditors in more than one country, so courts in those countries must cooperate.
• India has not adopted the UNCITRAL Model Law. UNCITRAL is the UN body that drafts model trade laws, and its Model Law lets countries recognise each other's insolvency cases.

• Jet Airways is the classic example: the Indian CIRP ran alongside a Dutch bankruptcy case.

• Group insolvency: handling several linked companies of one business group together, for example a parent and its subsidiaries.

• The 2026 Act:
• Lets the Central Government frame rules for both group insolvency and cross-border insolvency [3][4].
• But no complete framework is set out yet [3].

11. International standing

• World Bank Doing Business, "Resolving insolvency" rank: 108 → 52 (2019 to 2020 editions).
• The report was discontinued in 2021, so this is the last ranking.

Prelims Hooks

• The IBC replaced SICA/BIFR (1985), and the Supreme Court upheld it in Swiss Ribbons (2019). The model shifted from debtor-in-possession to creditor-in-control.
• Adjudicating authority: NCLT for companies and LLPs, DRT for individuals and partnership firms. Appeals from NCLT go to NCLAT, then to the Supreme Court.
• CIRP threshold: Rs 1 crore (raised from Rs 1 lakh, 2020). PPIRP threshold: Rs 10 lakh, MSMEs only.
• CoC = financial creditors only. A plan needs 66% by value. Operational creditors do not vote.
• Timelines:
• CIRP: 180 + 90 days, with a 330-day cap
• PPIRP: 120 days
• CIIRP: 150 + 45 days [3]
• Liquidation: 180 + 90 days [3]

• NCLT admission decision: 14 days [3]

• s.14 is the moratorium. s.29A bars defaulting promoters. s.53 sets the liquidation waterfall. s.66 covers fraudulent or wrongful trading.

• Waterfall trap: workmen's dues for 24 months rank equal to secured creditors. Government dues rank below unsecured financial creditors.
• The IBC gave 52.4% of banks' NPA recoveries in 2024-25, the largest of any channel [4].
• Essar Steel (2019) is the case on the "commercial wisdom" of the CoC. It is not about constitutional validity (that was Swiss Ribbons).
• Trap: in both PPIRP and CIIRP the debtor keeps control. In the regular CIRP, the RP takes control.

Mains Points

• Haircuts and moral hazard:
• Realisation is only about 33% of claims, with an average of 602 days to resolve (June 2025) [3]. Critics call this "haircut-driven resolution".
• But the right benchmark is liquidation value. Plans deliver over 170% of it (August 2025) [2].

• Delay itself destroys value. So the fix lies in NCLT capacity and less litigation, not in weakening creditor control.

• Twin balance sheet problem:

• Stressed banks and over-borrowed companies weighed each other down.
• The IBC now gives 52.4% of bank recoveries (2024-25) [4].
• The threat of losing control has improved credit discipline (a deterrent effect) [4].

• This supports lower NPAs, better bank capital (Basel III) and financial stability.

• Debtor-in-possession vs creditor-in-control:

• PPIRP and CIIRP keep the debtor in charge because it helps save the business's value.
• This gives speed and business continuity but risks promoters stripping assets.

• Safeguards include s.29A, RP oversight, and the CoC's power to switch to a regular CIRP [3].

• Unfinished agenda:

• Group and cross-border insolvency have only rule-making powers so far, with no UNCITRAL adoption [3].
• Tribunal vacancies remain a problem.
• Low pre-pack uptake.
• Workers and operational creditors (often MSMEs) are pushed down the waterfall. This matters for equity (fairness) in GS-III answers on inclusive growth.