IBC Reforms Aim To Balance Creditor Rights With Business Continuity

The new mechanism is expected to provide distressed firms with a window to stabilise operations while safeguarding creditor interests. The Parliament last week approved the Insolvency and Bankruptcy Code (Amendment) Bill, 2026. Among the key new provisions, the Bill has provided for a “creditor-initiated insolvency resolution process” with an out-of-court initiation mechanism for genuine business failures. Once implemented, this will help ease the burden on judicial systems, promote ease of doing business and improve access to credit. Shift from Creditor-in-Control to Debtor-in-Possession Under the existing framework, Section 29A of the Code bars wilful defaulters and delinquent promoters from bidding for their own stressed assets. The Corporate Insolvency Resolution Process (CIRP) also transfers control of the company from management to a resolution professional. However, the proposed Insolvency and Bankruptcy Code Amendment Bill, 2026 introduces the Creditor Initiated Insolvency Resolution Process (CIIRP), a new mechanism that allows the board of the defaulting company to continue managing day-to-day operations even after insolvency proceedings are triggered, reported The Times Of India. This marks a shift towards a debtor-in-possession model, where resolution is pursued through a negotiated framework between creditors and promoters rather than a complete management takeover. Role of Asset Reconstruction Companies The success of the CIIRP framework will depend significantly on debt consolidation. In large loan exposures, individual lenders often lack the required 51 percent voting share to drive resolution decisions. Here, Asset Reconstruction Companies (ARCs) are expected to play a crucial role by aggregating distressed debt and enabling coordinated decision-making. Hari Hara Mishra, CEO, Association of ARCs in India, said that CIIRP would enhance the role of ARCs as a resolution platform by combining debt aggregation with restructuring expertise, enabling faster and more effective outcomes. Faster Timelines and Incentive Realignment The CIIRP process is designed to be time-bound, with a resolution period capped at 150 days, extendable by 45 days, significantly shorter than the 330-day outer limit under CIRP. If resolution efforts fail, cases will revert to the conventional CIRP route. The framework also aims to realign incentives. By allowing promoters to retain control conditional on successful revival, the system seeks to discourage value erosion, diversion of resources, and prolonged litigation, issues often seen under imminent insolvency scenarios. Key Challenge: Creditor Coordination Despite its potential, the effectiveness of CIIRP will hinge on creditor consensus. At least 51 percent of lenders must agree on a resolution strategy and back the existing management to execute it. The proposed reforms reflect an evolving approach to insolvency in India, balancing creditor rights with business continuity and faster resolution, while attempting to preserve enterprise value in stressed assets. (KNN India)