Towards a fair, efficient insolvency regime
There must be a “universal CIIRP” with a “default-neutral initiation rule”. This proposal does away with regulatory status and replaces it with a threshold based on financial exposure
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Context
The article analyzes the proposed 2026 Amendment to the (IBC), specifically the introduction of the Creditor-Initiated Insolvency Resolution Process (CIIRP). While aimed at creating a hybrid 'debtor-in-possession' model to preserve distressed companies, the amendment restricts initiation rights to 'notified financial institutions,' raising concerns about constitutional validity and equity among creditors.
UPSC Perspectives
Economic
The aims to resolve corporate sickness efficiently, maximizing value while balancing stakeholder interests. The proposed Creditor-Initiated Insolvency Resolution Process (CIIRP) seeks to combine the traditional creditor-in-control model of the IBC with a debtor-in-possession approach, allowing existing management to retain control during restructuring. This is intended to prevent value destruction during liquidation. However, by restricting CIIRP initiation to 'notified financial institutions,' the amendment creates an arbitrary hierarchy. Smaller financial and operational creditors, already at the bottom of the waterfall mechanism (priority order for distributing liquidation proceeds), are further disadvantaged, potentially forcing them into more disruptive traditional restructuring methods to protect their interests.
Polity
The categorization of creditors under the new amendment invites constitutional scrutiny under of the Indian Constitution, which guarantees equality before the law. While the Supreme Court in the case upheld the distinction between financial and operational creditors based on 'intelligible differentia' (a reasonable basis for classification), creating a sub-class of 'notified' financial institutions within the broader class of financial creditors may be challenged as arbitrary. The government must justify why non-notified, yet sophisticated, investors are excluded from initiating a process designed to maximize value. This highlights the ongoing tension between legislative policy choices in economic matters and the constitutional mandate of non-arbitrariness.
Governance
The article highlights the 'Chakravyuha Challenge' in the Indian economy—easy entry but difficult exit for firms—which impacts the ease of doing business. A robust insolvency regime is crucial for efficient capital allocation. The current proposal, by creating an exclusive club of 'notified' institutions, contrasts with international best practices like Chapter 11 in the U.S., where access is based on objective financial criteria rather than regulatory identity. The authors propose a 'universal CIIRP' with a 'default-neutral initiation rule,' where any financial creditor with 51% backing can initiate the process. This approach would democratize the restructuring process, align Indian practices with global standards, and encourage foreign investment by removing perceived biases against certain asset classes.