🌑Knowledge Drop – 57: When Time Kills Value: Why India’s Insolvency Code Is Struggling to Deliver | For Prelims: InDepth MCQs| For Mains, All G.S Papers: High Quality Essays
Post: 11 Dec 2025
When Time Kills Value: Why India’s Insolvency Code Is Struggling to Deliver ⚖️⏳
(KD-57 | 11 December 2025)
Syllabus: GS3 – Economy
Context 🏛️
A recent report of the Parliamentary Standing Committee on Finance, titled “Review of Working of the Insolvency and Bankruptcy Code and Emerging Issues”, has warned that persistent and systemic challenges are eroding the effectiveness of India’s Insolvency and Bankruptcy Code (IBC).
What Is the Insolvency and Bankruptcy Code (IBC)?
The IBC, 2016 was enacted at a time when India’s banking system was choking under rising Non-Performing Assets (NPAs) and fragmented recovery mechanisms such as SARFAESI, Lok Adalats, and Debt Recovery Tribunals.
Key Structural Shift Introduced by IBC 🔄
- Replaced the debtor-in-possession model (under SICA)
- Introduced a creditor-in-control framework
- Empowered financial creditors to lead resolution through the Committee of Creditors (CoC)
Objectives of the IBC 🎯
According to the Insolvency and Bankruptcy Board of India (IBBI), the Code aims to:
- Resolve insolvency in a time-bound manner
- Maximise value of assets
- Revive viable businesses
- Improve credit discipline and entrepreneurship
What Has IBC Achieved So Far? 📊
- 1,194 companies resolved through the Corporate Insolvency Resolution Process (CIRP)
- Creditors recovered:
- ~170% of liquidation value
- ~93% of fair value
- Pre-Pack Insolvency Resolution Process (PIRP) introduced in 2021 for MSMEs:
- Debtor retains control
- Faster, less litigious
- Applicable to defaults up to ₹1 crore
Key Problems Flagged by the Parliamentary Committee 🚨
1. Delays That Destroy Value ⏱️
- Average CIRP duration: 713 days
- Statutory limit: 330 days
- Result: asset deterioration and falling recoveries
2. Structural Bottlenecks 🏢
- Shortage of NCLT benches
- Nearly 50% vacancies in tribunals
- Inadequate administrative staff
3. Litigation Overload ⚖️
- Frivolous appeals by promoters and failed bidders
- Delays caused by repeated legal challenges
4. Falling Recovery Rates 📉
- Overall recovery: ~32.8% of admitted claims
- Down from over 43% in 2019
- Many firms enter IBC too late, when value is already destroyed
5. Excessive Haircuts ✂️
- Over 70% of cases involve haircuts of ~80%
- Videocon case: 95.3% haircut
- Raises concerns about fairness and efficiency
Why Is Value Recovery So Weak? 🔍
- Asset valuation often based on liquidation potential, not enterprise value
- Limited pool of quality resolution applicants
- Gaps in transparency and accountability
Key Recommendations of the Committee 🛠️
Institutional Strengthening
- Set up more NCLT benches
- Fill judicial and technical vacancies urgently
Process Reforms
- Mandatory 30-day admission of insolvency cases
- Roll out Integrated Platform for Insolvency Ecosystem (iPIE)
Curbing Frivolous Litigation
- Upfront deposits for appeals
- Higher penalties for vexatious cases
Expanding Pre-Pack Framework
- Extend beyond MSMEs to other sectors
Data-Driven Oversight 📈
- Track delays, bottlenecks, and resolution outcomes digitally
- Measure haircuts based on actual asset value at entry, not original loan size
Why This Matters for India’s Economy 🌱
The IBC is central to:
- Banking sector health
- Credit flow to industry
- Investor confidence
- Ease of doing business
Without timely resolution, time itself becomes the biggest destroyer of value.
IAS Monk Whisper 🌀
A law that defeats delay can revive capital, but a law defeated by delay revives only distrust.
Target IAS-2026+: Highly Expected Prelims MCQs :
📌 Prelims Practice MCQs
Topic:
MCQ 1 | TYPE 1 — How Many Statements Are Correct?
Consider the following statements regarding the Insolvency and Bankruptcy Code (IBC):
1)The IBC follows a creditor-in-control model instead of a debtor-in-possession framework.
2)The Code mandates completion of the Corporate Insolvency Resolution Process within 330 days.
3)The Insolvency and Bankruptcy Board of India is responsible for judicial adjudication under the IBC.
4)IBC was enacted to replace fragmented recovery mechanisms like SICA and SARFAESI.
How many of the above statements are correct?
A)Only one
B)Only two
C)Only three
D)All four
🌀 Didn’t get it? Click here (▸) for the Correct Answer & Explanation.
🟩 Correct Answer: C) Only three
🧠 Explanation:
1)✅ True – IBC shifted control to creditors.
2)✅ True – Statutory outer limit is 330 days.
3)❌ False – Judicial adjudication is done by NCLT/NCLAT, not IBBI.
4)✅ True – IBC consolidated and replaced earlier fragmented mechanisms.
MCQ 2 | TYPE 2 — Two-Statement Type
Consider the following statements:
1)The Parliamentary Standing Committee noted that delayed admission of insolvency cases leads to asset value erosion.
2)The average duration of CIRP currently exceeds the statutory time limit.
Which of the above statements is/are correct?
A)Only 1 is correct
B)Only 2 is correct
C)Both are correct
D)Neither is correct
🌀 Didn’t get it? Click here (▸) for the Correct Answer & Explanation.
🟩 Correct Answer: C) Both are correct
🧠 Explanation:
1)✅ True – Delays reduce recoverable value.
2)✅ True – Average duration is around 713 days.
MCQ 3 | TYPE 3 — Code-Based Statement Selection
Consider the following statements regarding recovery under IBC:
1)Creditors recover a higher percentage of liquidation value than fair value.
2)Overall recovery rate has declined compared to 2019.
3)Late entry of stressed firms into IBC reduces recovery outcomes.
Which of the above statements are correct?
A)1 and 2 only
B)2 and 3 only
C)1 and 3 only
D)1, 2 and 3
🌀 Didn’t get it? Click here (▸) for the Correct Answer & Explanation.
🟩 Correct Answer: B) 2 and 3 only
🧠 Explanation:
1)❌ False – Recovery exceeds liquidation value but is below fair value.
2)✅ True – Recovery rate fell from over 43% to about 32%.
3)✅ True – Value erosion occurs before insolvency admission.
MCQ 4 | TYPE 4 — Direct Factual Question
Which body conducts adjudication of corporate insolvency cases under the Insolvency and Bankruptcy Code?
A)Insolvency and Bankruptcy Board of India
B)Reserve Bank of India
C)National Company Law Tribunal
D)Debt Recovery Tribunal
🌀 Didn’t get it? Click here (▸) for the Correct Answer & Explanation.
🟩 Correct Answer: C) National Company Law Tribunal
🧠 Explanation:
The NCLT adjudicates insolvency cases, while the IBBI regulates insolvency professionals and processes.
MCQ 5 | TYPE 5 — UPSC 2025 Linkage Reasoning Format (I, II, III)
Consider the following statements:
Statement I:
The effectiveness of India’s Insolvency and Bankruptcy Code is undermined by systemic delays.
Statement II:
Structural shortages in NCLT benches and frequent frivolous litigation prolong resolution timelines.
Statement III:
Delayed insolvency resolution leads to asset deterioration and excessive haircuts for creditors.
Which one of the following is correct?
A)Both Statements II and III are correct and both explain Statement I
B)Both Statements II and III are correct but only one explains Statement I
C)Only one of the Statements II and III is correct and that explains Statement I
D)Neither Statement II nor Statement III is correct
🌀 Didn’t get it? Click here (▸) for the Correct Answer & Ex
🌀 Didn’t get it? Click here (▸) for the Correct Answer & Explanation.
🟩 Correct Answer: A)
🧠 Explanation:
✅ Structural delays and litigation directly weaken IBC performance.
✅ Asset deterioration and high haircuts are consequences of such delays.
