IBBI’s recent CIRP reforms: Analysis of India's evolving corporate insolvency regime

The recent amendments by the Insolvency and Bankruptcy Board of India (IBBI) - the Fourth Amendment to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2025 (CIRP Regulations) and the The Insolvency Professionals to act as Interim Resolution Professionals, Liquidators, Resolution Professionals and Bankruptcy Trustees (Recommendation) Guidelines, 2025 (IP Guidelines) - have introduced some major changes to India’s insolvency framework.

The IBBI has inserted Regulation 18(5) and amended Regulations 36A and 38 in CIRP regulations to allow greater flexibility in the IBC regime.

The authors aim to critically evaluate the implications and legislative reasoning behind the new reforms, and opine that while the reforms are a welcome addition, there are certain critical challenges that must be addressed in order to empower the Insolvency and Bankruptcy Code (IBC) to deliver on its promises.

The newly inserted Regulation 18(5) of the CIRP Regulations provides for inviting interim finance providers as non-voting observers in the Committee of Creditors (CoC) meetings. Interim finance providers play an important role in ensuring that the corporate debtor (CD) remains a going concern by providing short term funds. However, despite their crucial contribution, their interests have always been secondary.

The amendment provides tactical visibility to such financiers, while ensuring that the CoC’s voting mechanism remains unchanged. This clever institutional compromise may incentivise interim financing by improving information symmetry, enabling better informed decision making and maintaining control in the hands of the financial creditors, as envisioned in the Code. This will also help in the creation of a sophisticated credit culture where rescue finance can be an investable asset class in itself.

Interim finance providers are accorded priority in repayment under Section 53 of IBC and Regulation 31 of the CIRP Regulations. However, there are practical concerns such as uncertainty in timing and realisation of debt, along with reluctance of CoC to repay interim financers to preserve funds. A predictable and enforceable payment mechanism which will protect their interests. Hence, including interim finance providers in CoC meetings is one of the many steps required to enhance their trust in the process.

The new amendment to Regulation 36A allows resolution professionals (RPs) to invite expressions of interest (EoIs) for specific assets or business divisions of the corporate debtor, subject to approval of the CoC. It has been observed many a time that the debtor’s assets are more valuable in fragments than as a single operational unit. By enabling a “carve out” approach to resolution, the regulation aims to introduce commercial realism into the CIRP, making the process more dynamic.

This modular bidding mechanism addresses a critical flaw in the present framework - the two-way result of either a full-company sale or liquidation. Such rigid structures do not properly help in the resolution of mid-sized or distressed companies which often hold valuable IP, real estate or operational units. Part-sale bids allow for a wider bidder domain, enhance the prospects of recovery, and makes the resolution process more efficient by allowing simultaneous negotiations.

As of March 2024, the average time to close CIRPs has been 679 days, more than double the 330-day statutory timeline. Furthermore, the recovery rates also decline sharply with time: 49.2% if resolved within 330 days, falling to 26.1% after 600 days. Moreover, out of 7,567 CIRPs initiated, 2,476 ended in liquidation compared to only 947 through resolution. Hence, there was a crucial need for mechanisms like modular bidding to expedite the CIRP and recover value.

While this approach is a welcome reform, it also raises a new set of challenges. The most important one being the approach that CoCs will have to employ in order to ascertain comparative values when different bidders bid for different segments of the distressed company. Furthermore, there are some clarifications required regarding the impact of the modular approach on employee continuity, tax liabilities and legal claims attached to the corporate entity as a whole.

Therefore, the success of this amendment will invariably depend on clearer valuation guidelines, judicial clarity on asset ring-fencing and the ability of RPs to manage multiple due diligence streams concurrently.

Perhaps the most disruptive of all new reforms introduced is the amendment to Regulation 38, which mandates that dissenting financial creditors be paid before financial creditors who have assented to the resolution plan.

This amendment acknowledges that the financial creditors who opposed a plan (but whose vote was overridden) should not be forced to take deeper haircuts than those who agreed to it. This can effectively counter the potential abuse of dominance by the majority in the CoC, especially dominant banks with exposure to multiple tranches of debt. It also aligns with non-arbitrariness principle under Article 14 of Constitution of India.

Nevertheless, this amendment is not devoid of contentions. Since resolution plans are commercially negotiated and often balance a delicate commonality of interests, forcing priority payments to dissenters may cause internal rifts. Furthermore, some creditors might choose to strategically dissent in order to secure a better payout, leading to delays or strategic holdouts. Therefore, while this amendment is well intentioned, it could introduce further complexities in financial planning and make it harder to reach a common consensus by providing an easy way out for financial creditors who are not interested in the revival of the distressed asset.

The new guidelines govern the formation of a panel of insolvency professionals (IPs) in advance, which is required to be shared with the adjudicating authority to avoid administrative delays in the appointment of IP. These guidelines provide the procedure for formation of the panel and attempt to make the insolvency proceedings more transparent and efficient.

In order for an IP to be eligible for inclusion in the panel, there must be no pending disciplinary proceedings against the IP as well as no conviction in the last three years by a court of competent authority. Moreover, the panel will have zone-wise and bench-wise lists for individual IPs based on registered office of the IP. Hence, there is attempt by IBBI to professionalise a space that has often suffered from inconsistent standards.

Another important aspect of the guidelines is penalisation of unjustified refusal of insolvency appointments by IPs, leading to a six-month debarment from panel listings. While this is necessary to address the reluctance of qualified IPs to accept time-consuming or reputationally risky cases, it is also quite controversial. The subjective interpretation of what constitutes a “valid reason” for refusal might lead to unintended penalties. In order to remedy this, a robust grievance redressal mechanism will be necessary, so that accountability can be balanced with fairness.

Moreover, this administrative overhaul might create some friction with the adjudicating authority, although it still retains discretion under justified circumstances. While the guidelines allow for deviation from the panel under “justified circumstances”, this discretion can be interpreted inconsistently across different benches. The adjudicating authority may pick up any name from the panel for the appointment of IRP, liquidator, RP, or BT for a CIRP. The IBBI has missed the opportunity to make the panel subject matter specific as well. Sectoral expertise of IPs is essential to ensuring an outcome that meets industry standards, especially in complex cases that require subject matter expertise.

The recent reforms reflect the IBBI’s aspiration to make the insolvency resolution process not just faster, but also more accountable and investor-friendly. But it is imperative to view these reforms in consonance with the underlying institutional limitations. The IBC framework still suffers from limited infrastructure at the NCLT level, valuation disputes, inconsistent judicial interpretation and information asymmetry. As of September 2024, the number of CIRPs resulting in liquidation (2,630) was still over 2.5 times the number resulting in resolution (1,068). Therefore, the recent reforms need to be accompanied by reforms in tribunal capacity building, cross-border insolvency framework and digital infrastructure for tracking CIRP timelines and outcomes. To that end, the following recommendations are offered:

Sector-specific accreditation for IPs: Complex cases in real estate, fintech, infrastructure and MSMEs require sectoral expertise that generalist IPs may lack. To bridge this gap, the IBBI should introduce a tiered accreditation mode which enables IPs to qualify for specialised categories through additional training and certifications. This would align IP capabilities with case requirements, improving outcomes and reducing procedural friction.

Mandatory post-resolution monitoring: While the recent amendment to allow modular bidding opens new possibilities, a robust digital infrastructure will be important for it to be effective and efficient. A dedicated online platform for real-time bidding of individual assets or business divisions under CIRP in collaboration with the BSE, NSE, or MSTC could be established. Such a portal could display distressed assets, real-time Expressions of Interest (EoIs) and help in transparent price discovery through competitive bidding. This would prevent undervaluation of viable assets.

The recent reforms by the IBBI represent a pragmatic shift in the insolvency regime. While the reforms aim to enhance procedural fairness, commercial confidence and prioritise stakeholders, their long-term efficacy hinges not on legislative intent, but on the insolvency ecosystem’s readiness to absorb these overhauls. Proper implementation of these reforms will be the real test of whether they are able to make the insolvency regime more transparent and reliable or whether the new reforms are simply performative.

Tushar Pundir and Riddhi Pandey are final year B.A.LL.B students at National Law University, Jodhpur.