IBC 2.0: Has the 2025 Amendment Fixed the Cracks in India's Insolvency Regime?

The Insolvency and Bankruptcy Code, 2016 was a watershed moment in India's corporate regulatory landscape. It replaced the patchwork of old laws and consolidated it within a single and efficient insolvency framework with a goal to rescue viable companies and to ensure a seamless exit for those that were beyond repair. The core objective of the code was clear- maximisation of asset values, encouraging entrepreneurship through a seamless exit option, increase lender confidence- and to overall curate a balanced resolution process.

However, the journey from on-paper to on-ground reality was presented with a plethora of challenges. The Code's promise of a speedy resolution was eventually grounded by procedural delays, prolonged litigation. Moreover, judicial interpretations gradually eroded the creditor-first approach of the Code.

To restore the orijnal intent of the code, Finance Minister Nirmala Sitharaman presented the IBC (Amendment) Bill, 2025 in the Lok Sabha on 12 August 2025. This ammendment bill marks a significant and curative transmission — firmly returning the control to creditors and thereby restoring the orijnal intent of the Code.

To understand the decisive need for the 2025 amendment, it is important to understand the key court rulings that disrupted the IBC. These were not minor legal wrinkles. They struck at the very foundation of the Code — predictability, speed, and creditor confidence.

Vidarbha Industries: Discretion over Default

The IBC was clear: if a financial creditor could prove a debt and a default, the insolvency process had to begin. It was meant to be quick and mechanical — not a deep dive into the company's finances.

But the Supreme Court changed this in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. By interpreting the word “may” in the law, the Court said the NCLT could refuse admission even if default is proven. It could consider other factors like the debtor's financial health or potential future awards.

This opened the floodgates. Debtors now had a new excuse to delay insolvency by showing some hopeful future inflow. It went against the core idea of a time-bound system. When a review petition was dismissed, the problem became permanent — making a legislative fix unavoidable.

Rainbow Papers: Priority Turned Upside Down

Another pillar of the IBC was the "waterfall mechanism" laid out in Section 53, which provides the hierarchy for who gets paid when a company's assets are liquidated. Secured financial creditors (like banks that have taken collateral) were placed high on this list, while government dues were placed significantly lower.

This established hierarchy was undermined by the Supreme Court's ruling in State Tax Officer v. Rainbow Papers Ltd. The Court ruled that if a state law creates a "first charge" on a company's property for unpaid taxes, the government shall automatically be considered a "secured creditor" under the IBC.

This ruling had significant impacts. It threatened to elevate government tax dues to the same level as secured lenders, defeting the overall intent of the waterfall mechanism. It thereby created a massive uncertainty for the banking sector, as the priority status they relied on when extending credit was suddenly undermined.

Group Insolvency: The Videocon Puzzle

The IBC was originally designed was designed to handle the insolvency of a single company. But buisinesses often operate through as complex webs of interconnected entities. When one fails, others collapse too.

In the Videocon Group case, the NCLT had to step in to consolidate 13 group companies under a single process to make resolution possible. It was a practical move, but was done without any statutory backing.

The absence a clear framework for group insolvency forced judges to be creative. It signals that the law was behind the ground reality of how business operate and thus created uncertainty for investors and buyers.

Major Changes: A Clean Surgical Fix

The 2025 Amendment is a direct and targeted response to these challenges. It acts as a surgical instrument, precisely excising the judicial interpretations and filling the legislative gaps that had weakened the Code.

Enforcing Timely Admission of Financial Creditor Applications

The 2025 amendment is not a cosmetic update. It is a precise surgical strike meant to remove every inefficiency that crept into the IBC through courts and loopholes. The Vidarbha ruling has been legislatively overturned. The NCLT must now admit a financial creditor's case within 14 days if following three conditions are met:

• Debt and default are proven.

• All paperwork is complete.

• No disciplinary action is pending against the proposed insolvency professional.

NCLT can no longer decide for admission by having looking at the financial health of the company or any hopeful future income. This discretion is gone, thus, preventing any unnecessary delay.

Restoring Creditor Priority Over Government Dues

To undo the Rainbow Papers disruption, the amendment tightens the definition of “security interest”, wherein only voluntary, contractual security qualifies. Statutory claims like tax dues are no longer under the umbrella. Thus, Banks regain their priority and government dues go back to their original position as provided for in the waterfall.

Group and Cross-Border Insolvency

The amendment finally equips the IBC to handle modern corporate structures by introducing formal frameworks for both group and cross-border insolvency. There are new provisions for the joint resolution of multiple interconnected companies within a group, preserving value and enabling more holistic rescue plans. Furthermore, a framework for cross-border insolvency, based on international best practices, will facilitate cooperation with foreign courts and help in tracing and recovering assets located overseas.

Strengthening Procedures:

The amendment also introduces a series of procedural changes that intend to eliminate delay tactics at every stage.

• Case Withdrawal: Once admitted, a case cannot be withdrawn before a CoC is formed. After formation, withdrawal needs a massive 90% CoC vote. The single-creditor backdoor deal is now shut. This move clearly shifts power back to financial creditors.
• Liquidation Process: The ammendment also ensures the completion of the entire liquidation process (for companies beyind repair) within a time period of 180 days (with only a single 90-day extension window).
• Extended Look-Back Period: To recover assets that were improperly transferred out of a company before its collapse, the code now allows for the reversal of "avoidance transactions." The amendment changes the start date for this "look-back" period from the date of admission to the date of filing the insolvency application. This shall prevent promoters from using delay tactics for admission and wait out the look-back period, making it much harder to hide fraudulent transactions.

Stakeholder Impact:

The 2025 Amendment does not treat all stakeholders equally, but represents a deliberate shift of power, altering the balance significantly.

• Financial Creditors: Banks and other financial institutions are the absolute beneficiaries. Mandatory admission grants them speed and certainty. The reversal of Rainbow Papers restores their priority, as provided for in the waterfall mechanism. The CoC's enhanced role, even in liquidation, further stiffens their control over the process.
• Promoters and Government Authorities: The amendment significantly decreases the ability of defaulting promoters to use litigation and procedural loopholes to delay or evade insolvency. For government authorities, the amendment is a clear setback. They lose the privileged "secured creditor" status granted by Rainbow Papers and are firmly placed lower in the payment hierarchy.
• Operational Creditors and Insolvency Professionals: For operational creditors, such as MSME suppliers, the changes are a mixed bag. They benefit from the overall acceleration of the process, which could mean faster, if smaller, recoveries. However, the amendment also introduces new procedural hurdles, like the mandatory submission of financial information to an Information Utility before filing a case, which could be troublesome for smaller entities. For insolvency professionals, their powers are expanded, but they also face stringent deadlines and greater scrutiny from both the CoC and the regulator, the IBBI.

Critical Analysis: Foreseeable Hurdles and Grey Areas

The amendment does tighten and reinforce the IBC. But real-world friction still lies ahead. Several issues remain unresolved, and new grey areas are emerging under the surface.

The Capacity Question: Can the NCLT Keep Up?

The amendment's most aggressive reform—the mandatory 14-day admission timeline—is also its greatest potential weakness. The NCLT benches are already overburdened, with cases often taking months, not days, to be admitted. Mandating a faster timeline without a corresponding increase in judicial infrastructure is an invite for trouble. The risk is that the bottleneck simply shifts from pre-admission to post-admission, with the system getting clogged at a later stage.

New Frontiers, New Conflicts

The new frameworks, while welcome, introduce a new plethora of complexities.

CoC Supervising Liquidation: Giving the CoC, which primarily consists only of financial creditors, supervisory powers over the liquidator creates a potential conflict of interest. A liquidator has a statutory duty to all stakeholders in the waterfall. Will a CoC-supervised liquidator be pressured to prioritise the interests of financial creditors over those of employees or operational creditors?

Creditor-Initiated Out-of-Court Process: This new experimental mechanism, while potentially faster, could be misused. A powerful consortium of lenders might use it to take control of a viable company facing only temporary liquidity issues, bypassing the judicial oversight of the NCLT.

The following table summarises the paradigm shift from the 2016 Code to the 2025 Amendment on key parameters:

Conclusion: A Sharper Law, A Bigger Test

The 2025 Amendment is aggressive, clear, and sharply focused. It openly favours creditors and speed. This is a conscious shift: economic certainty over judicial discretion, and commercial logic over debtor sympathy.

The reform does what it set out to do. It restores the core intent of the 2016 Code. It removes loopholes. It removes ambiguity. In essence, the law is now tighter, cleaner, and far more creditor-driven.

But this sharper Code brings a new challenge. Its success depends entirely on execution. The NCLT and related institutions will now need far more capacity, discipline, and oversight. If they fail to keep pace, the very push for speed could cause new forms of delay, confusion, or unfair outcomes.

In short: the law is now stronger — but the burden on the system is heavier than ever.

Views are personal

REFERENCES:

1. THE INSOLVENCY AND BANKRUPTCY CODE, 2016 ... - PRS India, accessed on August 16, 2025, https://prsindia.org/files/bills_acts/acts_parliament/2016/the-insolvency-and-bankruptcy-code-act,-2016.pdf
2. The Insolvency and Bankruptcy Code (Amendment) Bill, 2025 - PRS India, accessed on August 16, 2025, https://prsindia.org/billtrack/the-insolvency-and-bankruptcy-code-amendment-bill-2025
3. REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL ... - IBBI, accessed on August 16, 2025,
   https://ibbi.gov.in/uploads/order/a03e3063d5dbbca2bceb00f8402ec3ba.pdf
4. Comp. App. (AT) (Ins) No. 720 of 2021 NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI Comp. App. (AT) (Ins) N, accessed on August 16, 2025, https://nclat.nic.in/display-board/view_order_pdf?fid=9910105035062024&&l=delhi&&d=2025-05-16&&order_type=J
5. State Bank of India v. Videocon Industries Limited & Ors., (2018) SCC OnLine NCLT 669