Rewriting the rules of distress: Part I

In 2016, Parliament enacted an ambitious statute, the Insolvency and Bankruptcy Code, 2016 ("IBC"),  with the stated objective of achieving time-bound resolution of corporate insolvency within 180 days with one-time extension of up to 90 days i.e. 270 days. A decade later, the average time taken for closure of Corporate Insolvency Resolution Process (“CIRP”) had stretched to 744 days, as per the data published by the Insolvency and Bankruptcy Board of India ("IBBI"). The CIRP process had become a tool of delay rather than resolution, with promoters exploiting procedural gaps to stall creditor recoveries.

Since the IBC's enactment, three structural infirmities had developed. First, the Supreme Court's judgment in Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 352, had introduced judicial discretion at the admission stage by allowing corporate debtors to challenge CIRP initiation on the basis of financial health and extraneous considerations, thereby eroding the Code's core twin-test framework. Second, the Supreme Court's ruling in State Tax Officer v. Rainbow Papers Ltd., (2022) SCC OnLine SC 1162, had elevated certain government statutory dues to the status of secured creditors in the Section 53 liquidation waterfall, disrupting the hierarchy Parliament had deliberately designed. Third, the ambit of the "clean slate" doctrine as firmly established in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 and Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 while legally settled, continued to interact uneasily with outstanding statutory dues and post-resolution claims, creating residual uncertainty for resolution applicants.

With the passage of the Insolvency and Bankruptcy Code (Amendment) Act, 2026 on April 6, 2026, the Parliament has addressed these identifiable points through legislative amendments. The question this article seeks to answer is whether the Parliament has acted decisively enough to fix these issues.

The most consequential procedural change in the 2026 Amendment under Section 7 (5) (a) is the admission of a complete CIRP application by the NCLT becoming mandatory upon satisfaction of the twin test of debt and default. In Vidarbha Industries Power Ltd (supra), a two-judge bench of the Supreme Court held that by a literal interpretation of the word "may" in Section 7(5)(a), the NCLT possesses a discretionary power to decline admission of a CIRP application even where the twin test of debt and default is satisfied. This represented a significant departure from the settled position established in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 and ES Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd., (2022) 3 SCC 161, where the Supreme Court had consistently held that the NCLT's inquiry under Section 7 must be confined to verifying the existence of debt and default and nothing more. The Vidarbha judgment opened a floodgate of debtor-side arguments on financial viability, pending regulatory recoveries, and going-concern considerations that had no place in a threshold admission hearing.

Prior to the 2026 Amendment, the Supreme Court had substantially confined the scope of Vidarbha (supra). In M Suresh Kumar Reddy v. Canara Bank, (2023) 8 SCC 387 (decided 11 May 2023), a coordinate bench distinguished Vidarbha on facts and held that once debt and default are proved, the NCLT is bound to admit the application, re-affirming the position prior to Vidarbha. The practical consequence was a divergence of NCLT orders across benches as some were following Vidarbha broadly and others reading it narrowly, creating jurisdictional uncertainty that the Code was designed to eliminate.

The 2026 Amendment eliminates this uncertainty definitively. Section 7(5)(a) now mandates that upon satisfaction that (i) default has occurred, (ii) the application is complete, and (iii) no disciplinary proceedings are pending against the proposed Resolution Professional, the NCLT shall admit the application. There is no residual discretion. Where the NCLT fails to pass an admission order within 14 days of a complete application, it is required to record reasons in writing. This codification is consistent with Parliament's original intent as articulated in the Bankruptcy Law Reforms Committee Report. This revision will effectively remove as a source of delay the line of Vidarbha Industries cases that enabled debtors to manipulate the courts and induce delays in the commencement of their insolvency proceedings, thus causing the erosion of enterprise value pending commencement of the proceedings.

The most innovative provision of the 2026 Amendment is the introduction of the Creditor-Initiated Insolvency Resolution Process ("CIIRP") through Chapter IV-A (Sections 58A to 58K) of the Code. The CIIRP is a pre-insolvency, out-of-court restructuring mechanism available to financial creditors holding at least 51% of the total financial debt of the corporate debtor. Eligible creditors may initiate the CIIRP by issuing a 30-day notice atleast to the debtor. Pursuant to the notice, the debtor's existing board retains operational control under the oversight of a Resolution Professional, unlike a regular CIRP where the Interim Resolution Professional displaces the board and management of the corporate debtor upon admission. The CIIRP process operates for 150 days, extendable by 45 days. If the debtor fails to submit a resolution plan or otherwise obstructs the process, the NCLT may convert the CIIRP into a regular CIRP. This conversion mechanism provides an important failsafe against debtor non-cooperation, which had been a source of value destruction in the pre-CIIRP regime. The CIIRP resembles the debtor-in-possession ("DIP") model under Chapter 11 of the United States Bankruptcy Code, but with important structural differences.

In State Tax Officer v. Rainbow Papers Ltd., (2023) 9 SCC 545 (decided 6 September 2022), a two-judge bench of the Supreme Court held that the statutory first charge created under Section 48 of the Gujarat Value Added Tax Act, 2003 ("GVAT Act") constituted a "security interest" under Section 3(31) of the IBC, thereby elevating the State government to the status of a "secured creditor" for the purposes of the Section 53 liquidation waterfall. The practical consequence was an immediate and widespread disruption as state tax departments began filing or reviving claims in ongoing liquidation proceedings, asserting secured creditor status and threatening the viability of resolution plans already approved or in advanced stages of approval.

In Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., (2023) SCC OnLine SC 842, a coordinate bench of the Supreme Court sought to limit Rainbow Papers, observing that the waterfall mechanism under Section 53 had not been fully adverted to in Rainbow Papers, and that government dues rank below secured creditors and even unsecured and operational creditors in the hierarchy as per Section 53. The bench was unable to overrule Rainbow Papers, being of equal strength. The subsequent dismissal of review petitions against Rainbow Papers on the ground that the original judgment had in fact considered Section 53 meant that two conflicting lines of authority from equal benches of the Supreme Court coexisted. This was the legal impasse requiring legislative intervention.

The 2026 Amendment now definitively clarifies that government statutory dues created by operation of any law do not constitute "security interests" under Section 3(31) of the IBC for the purposes of Section 53 waterfall. This restores the Section 53 hierarchy Parliament had originally designed, placing government dues below secured creditors, unsecured financial creditors, and even operational creditors in the liquidation distribution. The Amendment is consistent with the Preamble to the IBC, which explicitly states Parliament's intent to "alter the order of priority of payment of government dues", signaling that the elevation of government dues above private secured creditors was never the legislative purpose.

The article is continued in Part II.

About the author: Madhu Sweta is a Partner at Singhania & Partners.

Aadrikaa Thakur, Intern, provided research assistance.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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